UOA Development - The Best of Both Worlds

UOA Development (UOA) is our 1Q13 Top Pick. They are targeting RM3.1-3.2b new launches (mainly ‘affordable segments’) over the next 12-18 months in highly sought-after locations. The group has achieved 4 major en bloc sales this year and total cash proceeds of RM470m will further deepen its current net cash position and cash pile of RM169m. This will enable the group to comfortably undertake Kencana Square infra works and Bangsar South’s next growth phase whilst ensuring they can meet our expected FY12-13E net dividends yields of 7.1%-6.0%. These are more attractive yields of sizeable M-REITs (4.5%-5.0%) and developers average (2%-4%). No changes to TP to RM2.30 based on 34%* discount to our FD SoP RNAV of RM3.43. Reiterate OUTPERFORM  given investors’ need for defensive havens.

4 major en bloc sales this year, from Horizon Phase 2 offices @ Bangsar South (one to DKLS, two to LTH, one to UEM Group). This speaks volumes of Bangsar South’s strategic location and Grade A (MSC and GBI compliant) buildings since Klang Valley’s office segment appears soft. Notably, they are the only ones doing en bloc sales this year, with the exception to MAHSING’s en bloc sale. The group has another 2 large Horizon Office Blocks (and a couple of small ones). Assuming similar pricing (RM700-750psf on GFA basis), we expect the group to raise  another RM300mRM350m, which will further strengthen their cash pile; if so and in addition to the cash received from this year’s en bloc sales, cash per share (c. 65sen) will make up c.40% of its current share price.

Cash hoard readies UOA for more landbanking and capital commitments. UOA is now in a net cash position whilst its two latest (Jln Ipoh and Kepong) lands have already been paid for. The group tends to buy land on 100% cash basis. UOA will be constructing the basement podium of the next phase of Bangsar South (where Vertical offices and hotel will sit on) over the next 18 months. Similarly, Kencana Square podium/basement works will also take place during this period. We estimate infrastructure capital commitments of RM200m-RM250m p.a. for the next 3-4 years, which can be easily funded by its enlarged cash pile. In terms of landbanking, the group did express interest in doing niche developments in Iskandar Malaysia (IM) although no timeline or specifics was offered. We believe it is a step in the right direction as we view Johor as the next growth market. 

Confident of dividend payout estimates, on the back on unchanged FY12-13E core earnings of RM290m-RM340m and sales of RM1.6b-RM1.8b. The group may experience a slight dip in gross margins in FY13E by 3.3ppt YoY to 44.5% due to recognition of Kencana Square construction works, which carry lower margins, at 100% stake; note development earnings will be recognized as associates (39% stake). However, it is still considered rich margins given that most developers range between 20%-30% levels.  In addition to the capital commitments and assuming minimum RM1b p.a. sales and conservative 30% net margin, we believe it will not affect dividend payouts (average of RM150m 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