UOL Group - DBS Research 2020-03-02: Ready To Rumble

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UOL GROUP LIMITED (SGX:U14)

UOL Group - Ready To Rumble

• UOL's FY19 earnings up 14% to S$478.8m from fair value and divestment gains; net profit (ex-gains) fell 6%.
• Healthy sell-through rates; expects to launch Clementi Av 1 site in 3Q2020.
• AEI / refurbishment on commercial and hospitality assets; could fast track plans amid COVID-19 situation.
• Declared FY19 dividend of 17.5 Scts, flat y-o-y.

Maintain BUY and Target Price of S$9.50.

• We maintain our BUY rating with a target price (TP) of S$9.50 for UOL Group (SGX:U14), pegged to 28% discount to revalued net asset value (RNAV). Our Target Price implies 0.8x P/ forward NAV, close to its 5-year +0.5 standard deviation (SD).
• The stock offers good value at 0.6x P/NAV and can potentially trade closer to its NAV as it unlocks value from its commercial and hospitality assets.

Net profit increased 14% y-o-y to S$478.8m

• UOL’s FY19 earnings increased 14% y-o-y to S$479m, mainly supported by higher fair value gains (S$220.3m) and divestment gains (S$39m), partially offset by the accounting reversal of development property backlog of S$76.4m recorded in FY19 vs S$56.2m in FY18 and early termination fee of the hotel management agreement of Marina Mandarin Singapore
• Attributable profit excluding the effects of fair value and other (including divestments) gains was 6% lower at S$314m.
• FY19 revenue fell 5% y-o-y, mainly due to lower contributions from property development (-14%) following the completion of development projects and hotel operations (-4%). Hotel operations was impacted by the closure of Pan Pacific Orchard for redevelopment, lower contributions from PARKROYAL Collection Marina Bay (rebranded from Marina Mandarin) and PARKROYAL Darling Harbour, and ongoing refurbishments at PARKROYAL on Kitchener Road. These were offset by higher revenue from property investments (+2%) and higher dividend income (+15%).
• Gross margins improved to 46% in FY19 vs 43% in FY18 due to a lower proportion from property development which has lower margins, and absence of accelerated depreciation for Pan Pacific Orchard recognised in 2018.
• 4Q19 net profit was 5% higher y-o-y at S$131m mainly due to higher fair value gains and lower interest expense, partially offset by higher taxes and lower revenues.
• The lower revenues was mainly due to lower progressive recognition from three development projects – Principal Garden, The Clement Canopy and Botanique at Bartley which TOP in end18/1Q2019; partially offset by higher revenue recognition from four development projects - Amber45, The Tre Ver, Avenue South Residence as well as Park Eleven in Shanghai.
• 4Q19 gross margin declined y-o-y from 49% to 44% due to an increase in property development contribution which commands lower margins.
• Declared first and final dividend of 17.5 Scts, flat y-o-y.
• See UOL Group Share Price; UOL Group Target Price; UOL Group Analyst Reports; UOL Group Dividend History; UOL Group Announcements; UOL Group Latest News.

Outlook

Residential – Healthy sell-through rates in Singapore projects (between 42-92% sold)

• UOL achieved total sales volume of 904 units with total value of S$1,337m
• UOL’s Avenue South Residence sold 447 units to-date (41.5% sold) vs 417 units sold (~39% sold) as at Nov19
• To-date, UOL’s ongoing projects (Amber45 and The Tre Ver), launched in May18 and Aug18, achieved 82% and 92% take-up respectively.
• Meyer House opened for private previews in May19 and sold 5 units as at Dec19 (9% take-up); UOL expects sales to pick up next year when project is closer to completion and surrounding area matures.
• Targets to launch its acquired site in Clementi Avenue 1 in 3Q20 and is confident of the project’s success given the overwhelming response for The Clement Canopy.
• Management continues to look for opportunities to replenish its landbank despite the economic uncertainties.
• In China, UOL launched phase 2 of Park Eleven in Oct19 with approved sales price of RMB85.4k psm vs RMB77k psm for phase 1. UOL achieved 60 bookings out of 183 units (33%); Phase 3 may be delayed due to the ongoing COVID-19 pandemic.
• In UK, The Sky Residences at One Bishopsgate Plaza held soft launches in Hong Kong and China since Oct19, and has achieved sales take-up of approximately 18% as at end Dec19 at an ASP of GBP2,047 psf.
• While the COVID-19 outbreak has not deterred home buyers from shopping for residential units, management expects that the construction industry could be impacted with labour shortages and uncertainties in the supply chain which may lead to delays in completion of projects. Management’s view that this may eventually warrant a review on the extension of ABSD deadline from 5 years to possibly 6 years (previous ABSD deadline).

Hotel – Impacted by COVID-19; fast tracking its AEI plans

• FY19 RevPAR was relatively stable throughout its portfolio; RevPAR of hotels in South-East Asia increased 5% y-o-y, partially offset by the 6% y-o-y decline in China hotel operations.
• Following the outbreak of COVID-19, occupancy at UOL’s hotels dropped to the 40-50% level while occupancy at service apartments has held up relatively well.
• Management expects that the hospitality segment will continue to be impacted as the virus spreads further. However, Management expects the pick-up in its hospitality segment to be fast after COVID-19 (similar situation after SARS outbreak). As such, management will look to speed up its AEI plans to be ready for the turnaround in the hospitality sector.
• Major hotels currently undergoing renovation and those targeted for AEIs include
  1. PARKROYAL COLLECTION Marina Bay – transforming into a “garden in a hotel” starting in 1H20 and expected to complete by FY21,
  2. Pan Pacific Orchard (Singapore) expected to open in FY21,
  3. Pan Pacific Serviced Suites Orchard (AEI will not impact operations),
  4. Pan Pacific London expected to open in 4Q20.

Commercial – Office portfolio: exploring redevelopment opportunities; Retail footfall returned last weekend

• Overall office portfolio achieved mid-single digit positive rental reversions. However, management believes that office rents will likely be weighed down by a mixed global economic outlook coupled by the challenging environment which is causing businesses to hold off expansion and relocation plans.
• UOL office portfolio occupancy remains stable at more than 90% except Odeon Towers at 82% (-17ppt) and Abacus Plaza at 83% (-17ppt).
• Refurbishment opportunities in its office portfolio include:
  1. Expand floor plate at Odeon Towers to link to the newly acquired KH KEA Building. The redevelopment will add another 32k sqft GFA from KH KEA Building and additional unutilised GFA under Odeon Towers,
  2. reviewing redevelopment of Faber House to leverage on URA’s offer to redevelop Midpoint Orchard, Orchard OG and Faber House as a whole.
• According to news reports, URA is offering to raise the plot ratio to 8.4 if all three buildings are redeveloped together. The plot ratio for Faber House is currently 4.9.
• Management believes there are more redevelopment opportunities especially under UIC’s office portfolio.
• Overall retail portfolio achieved flat to slightly higher rental reversions. Better performing malls could achieve up to double-digit rental reversions.
• Retail malls occupancy was relatively stable at above 95% except KINEX shopping mall at 83% (-1ppt) and Marina Square shopping mall at 87% (despite a 1ppt increase). While Velocity@Novena Square’s occupancy remained high at 95%, it fell 5ppt y-o-y.
• Overall shopper traffic increased 1.6%; shopper traffic at Marina Square and West Mall increased 1.4%.
• While COVID-19 has impacted its malls’ shopper traffic, which has fallen by 20 - 30% in the past few weeks, management highlighted that shopper traffic rebounded last weekend hitting close to pre-COVID-19 levels.
• Management intends to pass on the property tax rebates to their retail tenants.
• Negotiations are still ongoing with the government for a feasible redevelopment plan for Marina Square.

Rachel TAN DBS Group Research | Singapore Research Team DBS Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-03-02

SGX Stock Analyst Report BUY MAINTAIN BUY 9.500 SAME 9.500