UOL Group Limited: The Slow and Steady Wins the Race January 16, 2017

PSR Recommendation: ACCUMULATEStatus: Target Price: 7.05
  • Two new Singapore developments projects slated to be launched for sale in 2017 and 2018
  • Acquired two mixed-use buildings in London in 2016; Expect cap rate compressions amid low supply and vacancy rates of offices in Central London

 

Investment Merits

  • Nimble and well-executed development strategy; Only two launched projects remaining with more than 10% unsold units in Singapore portfolio

We favour UOL Group Limited (UOL) for its nimble and well-executed strategy especially in the current market environment where demand is curbed by a series of property cooling measures in Singapore. The result of the Group’s strategy mitigates its risk of facing potential charges or fines from clawback of additional buyers’ stamp duty (ABSD) should there be an overhang of unsold properties in a development.

  • Ample time to sell remaining units in Principal Garden coupled with strong development margins

The take up rate of Principal Garden has been encouraging as compared to two adjacent projects, The Crest and Mon Jervois. UOL still has plenty of time to clear the remaining units as the deadline for ABSD clawback is in April 2019. We project a development margin of 21% for Principal Gardens which is healthy compared to the other two developments.

  • Rental income from a diverse base of Singapore investment properties occupies lion share of profits; and expected to continue supporting operating performance

Rental income from investment properties made up of at least 50% of the Group’s total operating profits in the past three years between FY13 and FY15. UOL owns a mixture of investment properties ranging from serviced suite, office and retail properties where majority of these assets are in Singapore.

  • Strong occupancy rates for portfolio of office properties as majority of these assets are located in the fringe area which enjoy lower vacancy rates

UOL owns five office properties, yielding 100,000 square metres of net lettable area where they are mostly located in the fringe of the CBD area. As at 3Q16, the Group’s portfolio of Singapore office properties is standing at a healthy occupancy rate of 94% which is higher than the average occupancy rate of fringe offices (92%).

  • Continued depreciation of the SGD could continue to boost arrival numbers of Chinese and Indonesian visitors and benefit UOL’s Australia hotel operations

The boost in international tourist arrivals was led by a 36.1% and 5.9% growth in visitors from China and Indonesia respectively. We believe the depreciation in the SGD against the RMB and IDR was one of the main factors that led to an increase in tourist arrivals from these two countries. We view that a continued depreciation in SGD, translating into lower price points for goods and services in relative terms, will benefit domestic hoteliers.

 

Initiating coverage with “ACCUMULATE” rating and target price of S$7.05

We favour UOL for its consistency in operating performance since at least 68% of its operating profits are contributed from recurring income. As the local property development market extends a decline, the Group is well-buffered by its stability in earnings. On the property development front, UOL is nimble and sits on a relatively comfortable position as most projects are either close to being completely sold, or sitting on strong development margins according to our projections.

 

Company Background

UOL Group Limited (UOL) has four primary business segments, namely property development, hotel operations, property investments and investment in securities. Under UOL’s hotel subsidiary, Pan Pacific Hotels Group, the company owns the two brands, Pan Pacific and PARKROYAL. UOL has a 44.3% stake in listed property developer, United Industrial Corporation (UIC).

Property Development

Nimble and well-executed development strategy; Only two launched projects remaining with more than 10% unsold units in Singapore portfolio

Apart from two out of five ongoing development projects, namely Principal Garden and Riverbank@Fernvale, the other projects under the Group’s Singapore portfolio are at least 96% sold as at 3Q16. UOL adopts a laser-focused strategy in its property development operations where it refrains from participating in multiple development projects each time. UOL launched two development projects in 2015, Botanique at Bartley and Principal Gardens which are 96% and 53% sold as at December 2016.  We favour the Group’s nimble and well-executed strategy especially in the current market environment where demand is curbed by a series of property cooling measures in Singapore. The result of the Group’s strategy mitigates its risk of facing potential charges or fines from clawback of additional buyers’ stamp duty (ABSD) should there be an overhang of unsold properties in a development.

Figure 1. Details of launched development properties as at 3Q16

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Ample time to sell remaining units in Principal Garden coupled with strong development margins

UOL’s 70% owned 663-unit residential condominium project, Principal Garden was launched for sale in October 2015, and is 47.1% sold (inclusive of 263 unlaunched units) as at 3Q16. The take up rate of Principal Garden has been encouraging as compared to two adjacent projects, The Crest and Mon Jervois. UOL still has plenty of time to clear the remaining units as the deadline for ABSD clawback is in April 2019.
We project a development margin of 21% for Principal Gardens and is healthy compared to the other two developments. Unlike Principal Garden, The Crest is a 469-unit residential development which has 70% unsold units (328/469) in the development and is likely to face the clawback of (ABSD) amounting to S$51.6 million (S$96 PSF) as the developer is required to the remaining unsold units by September 2017. Similarly, Mon Jervois which has 43% unsold units (47/109) that remained unsold is most likely to face ABSD clawback in February 2017.

While the general belief is there may be near term price pressures as developers race to clear these remaining units, we view that this is unlikely as prices at The Crest and Mon Jervois would have been cut earlier if the respective developers had the intention to do so. We believe that developers of The Crest and Mon Jervois have considered that a price cut spree would be disadvantageous to them since Principal Garden has the lowest land acquisition cost out of the three developments (Principal Garden: S$820 PSF, Mon Jervois: S$862 PSF, The Crest: S$960 PSF).

 

Weaker development margin for Riverbank@Fernvale led by surmounting supply in OCR; 89% of development sold as at 3Q16

We expect UOL to book in the remaining profits in Riverbank@Fernvale, a 555-unit condominium project in the Sengkang district, in the next few months, as the development is expected to obtain its Temporary Occupancy Period (TOP) status by 1Q17. As at Dec 2016, 89% units in the development have been sold where the Group has another 15 months to clear the remaining unsold units before facing the clawback of ABSD. Although we are expecting weaker development margin of 8% from the development (compared to other development projects on hand), however, we view that the large number of unsold units and slowing demand in the Outside Central Region (OCR) may create price pressures for developments in the area. We noted that sales momentum in Riverbank@Fernvale decelerated due to the launch of High Park Residences in July 2015 which has a relatively lower land acquisition cost (S$443 PSF) compared to Riverbank@Fernvale (S$489 PSF).  We are optimistic that the remaining 11% of unsold units in Riverbank@Fernvale can be sold before the ABSD clawback deadline and maintain the current development margin as the land acquisition cost at the development is the lowest among other development projects in the vicinity (Rivertrees Residences: S$533 PSF, Recent GLS at Fernvale Road: S$517 PSF). ASP in December 2016 was the lowest in 2016 at S$910 PSF versus the highest of S$1020 in the year. Even if ASP maintains at the current level, we are of the view that there will be limited impact on the development margin on the entire project, considering that there remains only a small proportion of unsold units in the development.

Figure 2. Transacted prices and breakeven cost (orange line) for Riverbank@Fernvale

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