• UOL Group's FY18 core profits fell marginally (-1% y-o-y) from lower property development earnings, higher amortisation from United Industrial Corp consolidation, offset by higher dividend income form UOB.
• Expect to launch Meyerhouse and Avenue South Residence (total 1,130 units) in 2Q2019.
• 70% of units sold at Park Eleven Phase 1 will be handed-over in FY19, and profits are expected to be recognised; Phases 2 and 3 (230units) are slated for launch in 2019.
• Final dividend of 17.5 Scents, flat y-o-y.

What’s New

FY18 core profits fell marginally due to lower development profits, mitigated by higher UOB dividend income.

• UOL GROUP LIMITED (SGX:U14)’s FY18 earnings fell 51% y-o-y to S$434m, mainly due to the recognition of negative goodwill of S$535.6m in FY17 on acquisition net of the loss on derecognition of associated and JV companies arising from the United Industrial Corp (SGX:U06) consolidation, and higher net impairment losses.
• The impairment losses in FY18 were made in respect of Pan Pacific Melbourne (S$4.3m), a hotel under development in Bishopsgate, London (S$32.6m vs S$14.1m in FY17) and impairment of Pan Pacifc Yangon (40% owned) which was opened on 1 Nov 2017. These were offset by a write-back of impairment charge in respect of Pan Pacific Tianjin (S$6m vs S$9m in FY17).
• Excluding fair value and other gains, UOL Group's FY18 net profit would have fallen marginally by 1% y-o-y to S$348m despite a full year consolidation of United Industrial Corp’s results in FY18 vs the consolidation of only 4 months in FY17. This is largely due to lower contributions from property development, higher amortisation of development property due to United Industrial Corp consolidation (S$56m in FY18 vs S$24m in FY17), offset by higher dividend income declared by United Overseas Bank (SGX:U11, UOB) (S$48m in FY18 vs S$30m in FY17).
• FY18 revenue grew 13% y-o-y, mainly due to the consolidation of United Industrial Corp’s investment properties and hotels, 120 Holborn Island, and higher dividend income from UOB. This was offset by lower revenue (fell 15% y-o-y) from property development.

Higher 4Q18 core profits led by property investments and dividend income.

• UOL Group's 4Q18 earnings grew 65% y-o-y on higher fair value and other gains, offset by lower contributions from property development (revenue more than halved y-o-y) and higher net impairment losses. We estimate that 4Q18 net profit (ex-fair value and other gains) increased 9% y-o-y.
• 4Q18 revenue fell 30% y-o-y despite higher revenue from property investments led by the consolidation of United Industrial Corp, as this was mainly due to revenue from property development falling more than 50% as older projects have been completed/approaching completion, offset by new projects such as The Clement Canopy, Amber 45 and Park Eleven (approximately 30% i.e. 47 units out of 156 units sold have been handed-over). Management expects the remaining 70% of the units sold to be recognised in FY19.

Gross margins improved to 41%.

• UOL Group's Gross margins improved to 41% in FY18 vs 34% in FY17 led by higher contributions from property investments with higher margins. 4Q18 gross margin was 47% vs 35% in 4Q17.

Declared final dividend of 17.5 Scents.

• UOL Group declared final dividend of 17.5 Scents, flat y-o-y.

Outlook

Expected to launch remaining land bank (Meyerhouse and Avenue South Residence) of more than 1,000 units in 2Q19.

• Amber 45 (launched in May 2018) and The Tre Ver (launched in July 2018) continue to achieve steady sales with 71% and 40% sold to date respectively. UOL Group maintains its plans to launch both Meyerhouse (Nanak Mansions; 56 units) and Avenue South Residence (Jiak Kim, 1,074 units) in 2Q19.
• On Singapore property, management believes that buying sentiment is likely to remain subdued due to the cooling measures. Land prices are expected to moderate while en bloc sales could see limited success. On landbanking, management believes that Singapore property remains attractive. With an unsold inventory of some 480 units and unlaunched pipeline of 1,130 units, management believes they can remain selective on landbanking in the short-term but will continue to scout for new opportunities to replenish its landbank at an appropriate time.
• In China, the handover of Park Eleven Phase 1 began in Dec18. There are 109 units that were sold that are expected to be handed-over and recognised in FY19. UOL Group targets to launch Park Eleven Phase 2 with 127 units, and Phase 3 with 107 units in 2019.
• In UK, UOL Group targets to launch One Bishopsgate Plaza (160 units) in 3Q19 despite Brexit.

Hotels impacted by ongoing renovations.

• The RevPARs at the Singapore and Australian hotels increased by 6% and 0.6% y-o-y respectively. China and Yangon markets remain challenging. Pan Pacific Melbourne has taken quite a while to ramp-up, and its operational data is showing positive signs – the hotel achieved 93% occupancy in Feb19 and ADR is creeping up close to the previous rates charged.

Upward trends in office rental rates; retail showing signs of stabilisation.

• Management continues to see office rental rates on an uptrend, on healthy demand.
• Approximately 20% to 26% of its office leases (both UOL Group and United Industrial Corp) are expiring in 2019 and the bulk is in Odeon Towers (42%) and Stamford Court (64%). Management sees healthy enquiries to back-fill the space at Odeon Towers.
• On a positive note, management now sees signs of stabilisation of retail rents. Its retail malls are seeing positive rental reversions. In Singapore, OneKM, now renamed to KINEX, is undergoing a tenant repositioning exercise towards an “experiential mall” concept. Management believes the “worst is over’ for KINEX. KINEX’s pre-committed leases have reached more than 90%.
• In the UK, the office rental market in Midtown remains steady despite Brexit. Management believes that Midtown comprises mainly professionals and insurance companies, which are more resilient despite Brexit.

Maintain HOLD; Target Price of S$7.15

• We maintain our HOLD rating on UOL Group and Target Price of S$7.15 based on a 40% discount to RNAV.
• The stock is currently trading at 0.6x FY19F P/NAV, at close to 1 standard deviation below the historical average that it traded at during the last property cycle (FY13-17).
• While the current UOL's share price is at an attractive valuation which implies that potential downside risks from the recent implementation of new cooling measures is limited, we see limited catalysts for the stock and sector given expectations of a property market slowdown which historically implies that UOL's share price will likely be trading in a range.

Source: DBS Research - 27 Feb 2019