• UOL’s 50% owned United Industrial Corp (UIC) gains 100% control of Marina Square via acquisition of 25% stake in Marina Centre Holdings Pte Ltd (MCH) and Aquamarina Hotel Pte Ltd (AHPL) for a total consideration of S$675m. 
• Timely acquisition for UOL / UIC as the biggest beneficiary riding on the government’s plan to rejuvenate the central business district (CBD). 
• Price implies 1.2x P/NAV and half of RNAV.
• Upgrade to BUY; raised Target Price to S$8.53. 

Upgrade to BUY; Raised Target Price to S$8.53

• We upgrade our rating to BUY and raised our Target Price to S$8.53 from S$7.15 for UOL Group Limited (SGX:U14).
• Currently trading at 0.6x P/NAV, we believe UOL could potentially trade closer to its NAV as it slowly unlocks more value from its commercial and hospitality assets.

Where We Differ: Gaining Access to Prime Integrated Development With Redevelopment Potential

• Following UOL’s tightening grip on United Industrial Corp (UIC, SGX:U06) (50% stake), the purchase of the minority stake in Marina Centre Holdings Pte Ltd (MCH) is a surprise coup and should be read positively, in our view. With control over a prime integrated development comprising a retail mall and 3 hotels fronting the Marina Bay area, we believe UOL is positioned for asset enhancement / redevelopment riding on the government’s plan to rejuvenate the CBD.

Potential Catalysts

• Unlocking the value of its commercial and hospitality assets, recovery in office rental rates and hotel RevPAR, and property sales remain strong despite the change in sentiment. Taking further bold steps to riches. We believe UOL / UIC is positioned with many options to close its NAV/RNAV gap, including the securitisation of its hotels and commercial portfolios or potentially to privatise UIC with its thin free float at 12.9%.

Valuation

• We upgrade our rating to BUY with a higher Target Price of S$8.53, pegged to a lower discount of 35% to our RNAV and taking into account the higher valuation and stake in MCH and Aquamarina Hotel Pte Ltd (AHPL).

Key Risks to Our View

• Economic slowdown. The downside risk to our projections is if residential sales are slower than our projections or if commercial properties and hotel operations are impacted by slower-than-projected growth in rental/room rates.

What's New - Step-by-step to Bluer Skies

UOL’s 50%-owned UIC gains 100% control of Marina Square development; for AEI/redevelopment potential:

• United Industrial Corp (UIC, SGX:U06), a 50%-owned subsidiary of UOL, announced the acquisition of the remaining stakes in Marina Centre Holdings Pte Ltd (MCH) of 24.27% and Aquamarina Hotel Pte Ltd (AHPL) of 25% for S$485.3m and S$190m respectively. Post-acquisition, UIC / UOL will own 100% of Marina Square development including three hotels in the development, Pan Pacific Singapore Marina Mandarin and Mandarin Oriental Hotel (50% stake). The acquisition will be funded by UIC Group’s internal financial resources and external bank borrowings.
• According to Business Times, UOL’s CEO, Mr Liam, said UOL and UIC “will jointly explore asset-enhancement opportunities… …will also give us an opportunity to rebrand and rename the 575-room hotel”.

UIC to recognise S$218 one-off gain and NAV expected to increase to S$4.80:

• Based on the proforma figures, UIC’s PATMI will increase by S$222m (or 15 Scts per share; 88% of FY18 core PATMI), including a S$218m one-off gain arising from a change in recognition of the Company’s investment in AHPL from an associated company to a subsidiary. On the other hand, UOL’s PATMI will increase by S$4m (or 0.4 Scts per share; 1% of FY18 core PATMI).
• UIC’s NAV will increase to S$4.80 per share from S$4.74 per share while UOL’s NAV will increase marginally to S$11.31 from S$11.30.

Our Views

Timely acquisition for UOL/UIC as the biggest beneficiary riding on the government’s plan to rejuvenate the CBD:

• We believe the acquisition to gain 100% stakes in MCH and AHPL is very timely. With full control over prime assets at the Marina Square development, this allows UOL / UIC to potentially ride on the incentive scheme to rejuvenate the CBD as announced recently when planning for asset-enhancement and redevelopment opportunities. In addition, with UOL now owns a 50% stake in UIC (UOL has been raising its stake in UIC slowly since Nov 2017), UOL / UIC will be the biggest beneficiaries of any potential upside from any asset enhancements.

Acquisition price implies 1.2x P/NAV and half of RNAV.

• The acquisition price of MCH is estimated at 1.2x P/NAV. However, the price is at 50% below our estimated RNAV of MCH, assuming potential upside to be derived from asset enhancement.

UIC has huge debt headroom for acquisition and asset enhancement.

• UIC’s net debt to equity stands at a mere 3% as at Dec 2018 which offers ample debt headroom to fund the acquisition and any potential asset enhancement/redevelopment of the properties. This gives UIC the opportunity to improve the efficiency of its capital structure.

Preclude to unlocking a bigger value in UIC?

• Given the potential upside from enhancing Marina Square development and the free float of UIC has now reached 12.9% (almost reaching the 10% free float mark to be delisted), we believe UOL / UIC has a few options to potentially unlock a bigger gain from its investments in UIC. Firstly, with the free float limit approaching, UOL / UIC may potentially delist UIC if UOL continues to acquire without triggering a mandatory general offer ( < 1% every six months which will only take another 18 months). We believe UIC which is currently trading at 0.6x P/NAV is an attractive valuation to be taken private. In addition, UIC’s current share price of S$2.98 is below the price in which UOL first started to accumulate UIC’s shares from the open market at S$3.34 per share.
• Alternatively, with control over more prime assets, UOL / UIC could explore potentially securitisation of its commercial/hospitality assets to allow these assets to be traded at a valuation closer to its NAV / RNAV.

Upgrade to BUY; Raised Target Price to S$8.53

• We upgrade our rating to BUY and raised our Target Price to S$8.53, factoring in the higher stake and valuation of MCH and AHPL post the acquisition and reducing the discount RNAV to 35% from 40% previously. We believe gaining control over prime assets warrants a lower discount.
• Given its recent actions (gaining control in UIC and now MCH), UOL is now positioned to unlock the value of its commercial and hospitality assets. The stock is currently trading at an attractive valuation, 0.6x P/NAV, at close to - 1SD of its historical average that it traded at during the last property cycle (FY13-FY17). We believe UOL could potentially trade closer to its NAV as it slowly unlocks more value from its commercial and hospitality assets.
• Our target price implies 0.8x P/NAV.

Source: DBS Research - 16 Apr 2019