• UOB's current valuations still inexpensive at near 1.5SD below its average 15-year forward P/BV.
• Ongoing provisioning is a buffer.
• Some negatives, including lower net interest income and overhang from asset quality, has been priced in.

Inexpensive Valuation; Ongoing Provisioning Is a Buffer

• Even after UOB's share price gaining > 10% since early November, we believe there is further room to re-rate amid expectations of a gradual pick up in long-end yields. We see UOB (SGX:U11) as a proxy to economic recovery. It’s strong non-performing asset (NPA) coverage of 111% (2Q20: 96%) and ongoing provisioning (management guides for S$2-3bn through FY20-21F) will limit downside risks.
• Management has guided for better-than-expected asset quality outlook during 3Q20 results briefing.

Some Negatives Have Been Priced in

• Despite the dividend cut, UOB's yield of 4% is relatively attractive, with management indicating willingness to revert to its FY19 dividend policy.
• We believe the market has priced lower net interest income in FY21F. As we expect some asset quality deterioration in 2H20 and 1H21, especially when the various moratoriums and reliefs expire, share price upside may be capped at ~1x P/BV.

Potential Catalyst: Sustained Positive Deliveries

• Lower–than-expected credit costs could drive earnings. Recovery in ROE post COVID can drive UOB's share price.

UOB - Valuation

• Maintain BUY and target price of S$24.80. Our target price of S$24.80 is based on the Gordon Growth Model (9% ROE, 3% growth, 9% cost of equity [previous: 10%]). This is equivalent to ~c.1x FY21F P/BV, near 1 SD below its average 15-year forward P/BV multiple.

Where We Differ

• We remain conservative over UOB’s income outlook in FY21-22F; we believe that management is likely to continue strict cost discipline to manage its bottom line.

Source: DBS Research - 24 Nov 2020