UOA Development - A ‘defensive’ developer

UOA Development’s (UOA) total GDV has increased to  RM15.0b from its IPO guidance of RM13.0b thanks to its new  projects at Jalan Ipoh and Kepong, which excludes the potential 15-20% upside to Bangsar South’s remaining GDV of RM5.0b due to the area’s run-up in capital values. The group is targeting RM3.1-3.2b of new launches (mainly ‘affordable segments’) over the next 12-18 months in highly sought-after locations. Cash proceeds from sale of its en bloc offices of RM298.0m means UOA can comfortably undertake Bangsar South’s next growth phase, whilst ensuring it meets our expected FY12-13E net yields  of 7.6%-6.9%, higher than the sizeable M-REITs (4.5%-5.0%). No changes to our TP of RM2.30, based on 34%* discount to our FD SoP RNAV of RM3.46. Reiterate OUTPERFORM given investors’ need for defensive havens. 

Upsides for FY12E sales may come from another en bloc sale. To recap, 1H12 registered RM900.0m sales. Our FY12E target of RM1.2b is achievable with its en bloc sales to LTH (RM204.0m) and on-going project sales, including the recently previewed ‘Desa Green’ (GDV: RM600.0m). The group has 3 more Horizon Office Blocks, of which 2 will be kept for rental (100% and 60% occupied) whilst the remaining is earmarked for sale. Assuming similar sale price as LTH’s or RM102m/block with transaction by year end, it will increase FY12E core earnings by 13% to RM305.0m, in addition to higher sales.  Cash hoard prepares UOA for capital commitments. Upon completing the 3 en bloc sales (one to DKLS and two to LTH), the group will have amassed an additional RM298.0m cash, in addition to their 2Q12 cash pile of RM137.0m and on-going billings. UOA is now in a net cash position whilst its two latest (Jalan Ipoh and Kepong) pieces of land have already been paid for. Based on the above mentioned on Bangsar South, we estimate capital commitments of RM100m-RM150m p.a. for the next 3-4 years, which can be easily funded by borrowings. In terms of landbanking, the group did express interest in doing niche developments in Iskandar Malaysia (IM) although no timeline or specific plan was offered. We believe it is a step in the right direction as we view Johor as the next growth market. 

Bangsar South is reaping fruits of its labour. UOA will be constructing the basement podium (c.10k car bays) and its cost of RM100.0m will be spread over the next 18 months. Sitting above the basement will be the Vertical Offices (2 blocks), a hotel and a 50-storey office building. We understand the two latter components are intended for investment, so capital commitments for both are c.RM500m over 2½-3 years; however, these component’s works will only take place after most of the basement works are done. The hotel has attracted a list of reputable operators given the sizeable corporate content of Bangsar South. 

Confident of dividend payout estimates, on the back of unchanged FY12-13E core earnings and sales (RM1.2b-RM1.5b). In addition to the capital commitments and assuming minimum RM1.0b p.a. sales and conservative 30% net margin, we believe it will not affect dividend payouts (average of RM150.0m p.a.) for the next 2-3 years.  Key launches for the next 12-18 months amount to RM3.1b-RM3.2b; Kencana Square@Glenmarie (refer below), Scenaria/KiaraIV, Desa III, Desa II  Phase 1 (Commercial), Desa Green and Kerinchi SoHo.  * Current discount of 34% to FD SoP RNAV of RM3.43  (post IDRP adjustment) is based on 1.23x FY13E PBV @ +1.5SD to average since listing.

Source: Kenanga