UOA Development - OUTPERFORM

UOA Development (UOA) is proposing a dividend reinvestment scheme (DRS), which may be applicable to FY11E NDPS of 10.0 sen (6.7% yield). Assuming 100% of FY11E NDPS is electable for the DRS, the dilution impact on  FY12E  is  only  6%.  Hence,  we  are  not  worried  about dilutions given FY12-13E strong core earnings growth of 39%-35%. We have raised our FY12-13E NDPS by 67%-33% to 11.2-12.1 sen, respectively, as management is confident of providing similar, if not better, dividends to FY11E. Even with a 6% dilution, FY12-13E will still provide higher yields vs. FY11. We view the DRS positively as it will reward shareholders, conserve internal cash and improve market capitalisation/liquidity. We  maintain  OUTPERFORM  and  TP  of  RM1.65  (based  on 52% discount* to FD SoP RNAV of RM3.46). We expect the group's products to buck the bearish property trend while the anticipation of its  continuous strong dividend payouts will lend strength to the stock. 

UOA has proposed a dividend reinvestment scheme (DRS), subject to shareholders approval  during the upcoming AGM (29/5/12). This will be the first developer to adopt such a policy, to our knowledge. Another company which has adopted a similar policy is Axis REIT (OP; TP: RM2.82). Under the proposed DRS, UOA has the discretion to provide shareholders an option to reinvest part or whole of the declared dividnds in new UOA shares. There is no official cap on the maximum number of new  shares  arising  from  the  DRS,  as  it  is  only  subject  to  the  quantum  of dividends, issue price, electable portion and the number of shareholders opting to reinvest their electable portions. The issue price however must be no more than a 10% discount to the 5-day VWAP prior to the price fixing date. (See below). 

Proposed FY11E NDPS of 10.0 sen may be entitled to the DRS scheme. The company will be seeking shareholders’ vote for concurrent approvals of the FY11E NDPS of 10.0 sen (6.7% yield) and the DRS scheme. Hence, FY11E NDPS could be entitled to the DRS.  We are not worried about dilutions as long as there is strong core earnings growth. We are confident of our estimates and believe that the strong FY12-13E core earnings growth of 39%-35% will provide safety nets against significant dilutions. Assuming the entire FY11E NDPS of 10.0 sen (RM119.6m) is elected for the DRS, we expect the share base and market cap to grow by 7% each to 1.28b shares and RM1.91b respectively. Although the dilution impact on FY12E core EPS will then be 6% to 21.1sen, it will still show a 30% YoY increase. 

Dilutions on future dividends still imply attractive yields. However, we are revising up our FY12-13E NDPS by 67%-33% to 11.2-12.1 sen (7.5%-8.1% yield) on higher net payout estimates of 50%-40% vs. 30% previously, as management is confident of providing similar, if not better dividends to FY11E. Assuming the 6% dilution impact as described above, FY12-13E net yields of 7.0%-7.6% will still be higher than FY11E’s 6.7%. Additionally, there is the possibility of a special dividend, assuming any en bloc sales of Horizon office blocks @ Bangsar South, which has yet to be imputed in our estimates. 

Positive on the proposed DRS. The rationale of the exercise is to reward shareholders as investors may be rewarded with cheaper entry points. We laud UOA for the measure as it will help to improve liquidity and market capitalisation, while allowing the group to conserve cash and leverage on a higher capital base for more landbanking opportunities. 

Source: Kenanga