Tre Ver likely to spearhead recovery for UOL group

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UOL’s 2Q18 core PATMI of S$94.1m (-6% YoY) came in slightly below projections/consensus, which is attributed to the uneven recognition of profits from development property.

We estimate that sold residential units surged 5x QoQ, to 145 units, helped by solid sales at 62%-sold Amber 45.

Despite cooling measures, UOL has not changed its launch schedule for the three upcoming projects, which we believe is due to their competitive cost.

While the contribution from OneKM fell, the proposed AEI should reposition it as one of the beneficiaries of the rejuvenation of Paya Lebar Regional Centre, spearheaded by the upcoming Paya Lebar Quarter project.

UOL has declined 21.1% YTD, underperforming both Developers (-10.1%) and FSSTI (-4.0%), but an overweight stance is maintained view of: (1) undemanding valuations, with a P/B of 0.62x and an RNAV discount of 43% vs. the mean of 0.76x and a 30% discount; (2) competitively priced landbank; and (3) the potential acquisition of the remaining stake in UIC.

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We see an immediate share price catalyst in the form of decent initial take-up (30-40%) for The Tre Ver (to be launched on the weekend of 4 Aug 2018), as well as near-term catalysts via the appointment of a new CEO and NAV-accretive residential land acquisitions, given its low gearing of 23% and a subdued land market presenting opportunistic acquisitions.

2Q18 reported PATMI rose 21% YoY, to S$132.7m, helped largely by higher revenue contributions from property development (+27%) and property investments (+134%) from the consolidation of 50.1%-owned United Industrial Corporation (UIC), as well as higher dividends from United Overseas Bank (65 Scts/share vs. 35 Scts in 2Q17) and revaluation gains. Adjusting for one-off items, we estimate that 2Q18 core PATMI fell 6%, to S$94.1m, with 1H18 core PATMI of S$180.6m (flat YoY) comprising 44%/43% of our/consensus full-year projections. Net gearing remained healthy, at 23% (+2%pts QoQ).

Revaluation gains of S$64m, underpinned largely by UIC’s properties Singapore Land Tower (S$20m), The Gateway (S$10m), UIC Building (S$9m) and SGX Centre (S$7m), offset a slight revaluation loss at UOL’s One KM (S$7m). However, NAV/share inched down 0.4% QoQ, to S$11.34, or a P/B of 0.62x.

Residential units sold surged 5x QoQ, to 145 units (on our estimates), solely contributed by two projects: Amber 45 (88 units since May-18 launch) and The Clement Canopy (57 units). With its maiden launch in 2018, Amber is 45 already 62%-sold. UOL will officially launch The Tre Ver (729-unit 99-yr leasehold midrange project along Potong Pasir Avenue 1) on 4-Aug-18 after previewing the showflat for the past two weeks. UOL did not share the number of cheques collected so far, but expects demand to be driven mainly by first-timers. There should be some early-bird discounts, though we expect the project to launch at S$1,550-1,600 psf, which translates into a healthy PBT margin of 16-19% on breakeven of S$1,300 psf. While UOL’s unsold landbank stands at a sizeable ~2,000 units (i.e., inventory cycle of about three years), we think the low gearing of 0.23x could enable it to acquire opportunistically in the current subdued land market. In fact, UOL expects the cooling measures to tame land prices, especially in the collective en-bloc market.

Recent cooling measures to moderate both the residential sales take-up and prices for rest of 2018, though realistically priced projects with strong locational/product attributes will continue to attract buyers (particularly first-timers), according to Deputy Group CEO Mr. Liam Wee Sin. On the bright side, UOL has not changed its launch schedule for its three upcoming projects, which we believe is due to its competitively priced landbank, namely The Tre Ver (S$870 psf) in 3Q18, as well as 92-128 Meyer Road (S$1,429 psf) and Silat Avenue Site (S$1,138 psf) in 2019.

OneKM Mall to undergo an asset enhancement initiative (AEI) whose repositioning plans will be announced over the next few months. Due to the planned AEI, more short-term leases were put in place, which explains the lower contribution this quarter. Overall retail performance was mixed, with mid-single-digit negative reversions, though positive reversions were witnessed for its Grade A office buildings. Its upscale hotels in Singapore saw flattish RevPAR growth.

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UIC’s 2Q18 reported PATMI surged 47% YoY, to S$108.4m, due largely to revaluation gains of S$48.2m. Adjusting for one-off items, 2Q18 core PATMI declined 24%, to S$64.5m, as gross profit from property development plunged 75% due to projects completed and substantially sold in 2017. Net gearing remained healthy, at 4%, with the latest book value of S$4.65/share (+1% QoQ), translating into a P/B of 0.68x.