DBS Group Research is keeping its “buy” recommendation on UOL Group albeit with a lower target price of $8.40 from $9.50 previously.
“The stock offers good value at 0.6 times FY20 P/NAV (at close to -1 SD) as it progressively recovers post the reopening of Singapore’s economy,” says lead analyst Rachel Tan in an Aug 6 report.
This is despite the company announcing in a profit guidance that it expects to report a loss for 1H20. The group attributed this negative performance to the Covid-19 pandemic.
Nonetheless, management says that its financial position "remains healthy with a low
net gearing ratio of approximately 0.32 and the group is expecting an attributable profit
from operations before fair value losses from investment properties".
UOL is expected to announce its 1H20 results on Aug 13.
Meanwhile, UOL derives a significant 50-60% of its revenues from the retail, office and hotel segments which should continue delivering stable cash flows in the coming years.
Its 50%-owned subsidiary UIC’s portfolio of investment properties is complementary to the group’s exposure to largely city-fringe properties as a majority of the group’s properties are located in the CBD. The tight competitive supply within the CBD should result in potentially stronger rental reversionary prospects.
As for the group’s retail malls in Novena, United Square and Novena Square, are located close to the emerging medical hub. The malls have formed a niche, which should result in high tenant stickiness.
UOL also has plans, albeit still preliminary, to redevelop Marina Square. Management sees two low-hanging fruits: rebranding of Marina Mandarin into ParkRoyal Collection Marina Bay; and the potential redevelopment of Marina Square with land banking opportunity, plot ratio enhancement and potential uplift of land tenure.
According to the government’s incentive scheme, a residential component will have to be included in the redevelopment plans. UOL’s management sees this as a land banking opportunity in the medium term which would enhance NAV but the prohibitive development costs could be a hurdle to cross.
For the group’s hospitality segment, Tan says, “Despite a weaker outlook in some markets within the group’s hotels and residences, we believe new/refurbished hotels will drive growth, such as Pan Pacific Melbourne (via acquisition), Pan Pacific London (expected to open in 2HFY20) and refurbished hotels such as Pan Pacific Orchard (expected to open in FY21) and Pan Pacific at Kitchener.”
As for its residential projects, UOL in FY19 managed to sell most of its projects, with The Tre Ver being 78% sold, while Amber45 was 80% sold. Despite uncertain market sentiment in FY19, UOL continued to maintain steady sales momentum and capitalised on the improving sentiment in 2H19 to launch its key project, Avenue South Residences which saw strong take-up and was 22% sold.
“Compared to its peers, the bulk of UOL’s earnings are contributions from its Singapore portfolio. We believe the extensive backing from the Singapore government provides good downside support and the progressive reopening of the Singapore economy bodes well for UOL, moving forward,” Tan adds.
In addition, the potential redevelopment of Marina Square would position UOL on its next phase of growth post Covid-19.
As at 1.35pm, shares in UOL are trading at $6.63 or 0.6 times FY20 book with a dividend yield of 2.7%.
