UOL Group Ltd: Strong outlook remains intact

By Foo Sze Ming
Wed, 24 Feb 2010, 08:52:40 SGT

UOL Group reported its 4Q09 results that came in below our expectations. 4Q09 revenue increased 4.8% YoY to S$272.7m, falling short of our expectation by 17% due to the slower-than-expected construction schedule for some of its development projects. On a positive note, the pickup in hotel operations was stronger than expected in 4Q09. Excluding one-off gains and revaluations, core PATMI would have increased by 28.9% YoY to S$83.6m in 4Q09. Despite recent property measures, there will be no change in its plans to launch the Dakota Crescent site and the former Rainbow Gardens site in April/May. We have now raised our FY10 PATMI forecasts by 34.5% to S$380.2m. We now roll over our RNAV to FY10 and our fair value, which is pegged at parity to RNAV, has been raised to S$5.25 per share. UOL remains as one of our top picks in the property sector. With an upside potential of 31.3%, we maintain our BUY rating on UOL.

Below-expectation results due to timing of revenue recognition. UOL Group reported 4Q09 results that came in below our expectations. 4Q09 revenue increased 4.8% YoY to S$272.7m, with 55% of the revenue coming from property development. Revenue fell short of our expectation by 17% due to the slower-than-expected construction schedule for some of its development projects, which affected the timing of revenue recognition. On a positive note, the pickup in hotel operations was stronger than expected in 4Q09. Fair value losses of S$70.6m on its investment properties were recognized in 4Q09. Nevertheless, PATMI reversed from a loss of S$114.1m in 4Q08 to a profit of S$6.9m in 4Q09. Excluding one-off gains and revaluations, core PATMI would have increased by 28.9% YoY to S$83.6m in 4Q09.

Going ahead with residential launches. Management shares the view that recent property measures target only speculative activities and are unlikely to affect genuine buyers. As such, there will be no change in its plans for residential property launches. The Dakota Crescent site and the former Rainbow Gardens site are expected to launch in April/May.

Raising our FY10 earnings estimate by 34.5%. We have now raised our FY10 PATMI forecasts by 34.5% to S$380.2m, after adjusting our construction schedule and raising our FY10 residential sales forecasts. This is in line with our expectation of a strong mid-high end residential property market in 2010. We have also introduced our estimates for FY11 and we expect UOL to continue delivering strong PATMI of S$382.5m in FY11, underpinned by the progressive recognition of revenue from its residential sales in 2009.

Fair value raised to S$5.25; Maintain BUY. We now roll over our RNAV to FY10 and our RNAV estimate and fair value (which is pegged at parity to RNAV) have been raised to S$5.25 per share (previously S$4.55), largely due to an 11.8% increase in our re-appraised value of the investment properties and an 8.1% increase in market value of UOL’s listed investments. We raised our valuation of the investment properties after considering the improved macro-economic outlook, but our valuation remains conservative as it is still 24% below the latest independent valuation. We continue to like UOL for its strong earnings outlook and attractive valuation (Price/NAV: 0.76x, Price/RNAV: 0.76x) and we also believe that its hotel subsidiary, Pan Pacific Hotels Group, is under-appreciated by the market as it is still trading at a discount of 29% below its revalued NAV of S$2.10 per share. UOL remains as one of our top picks in the property sector. With an upside potential of 31.3%, we maintain our BUY rating on UOL.

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