Citigroup analyst Brandon Lee has kept his “buy” call on UOL Group U14 but with a raised target price of $9.08 from $8.43, on prospects that the valuation gap between the current price and RNAV can narrow.
In his April 12 note, Lee says that UOL, thanks to its sizeable hospitality exposure and healthy balance sheet, has gained 5% gain year to date, thereby outperforming its peers’ 2% and the broader market’s 1% gain over the same period.
While the hospitality recovery will help improve margins and ROE, thin margins from its residential developments are “unlikely to excite investors”.
“Hence, we would like to see UOL execute more ROE-enhancing initiatives, such as higher dividends, share buybacks, and asset monetization, to narrow RNAV discount,” writes Lee.
The company has two ongoing projects which Lee expects “decent take up”.
According to Lee, Pinetree can fetch $2,450 psf, versus breakeven cost of $2,200 psf. The former Watten Estate Condo, meanwhile, breaks even at $2,730 psf and can move at $3,000 psf.
While they are in prime locations, the profit before tax margin, estimated at some 10%, is unlikely to “excite the market”.
Property development aside, UOL is enjoying steady recovery of its hospitality business, with Singapore and Australia, two of its biggest markets.
Both markets' RevPar as at end FY2022 was still 80% of pre-pandemic levels.
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Chinese tourists have yet to return in full force. When they do, Lee expects UOL’s hospitality EBITDA margin, which was at 19% in FY22, to trend closer to pre-COVID level of 26-29%.
UOL’s share price has been trading at a discount to its RNAV and Lee believes this is due to “benign” ROE of 3.5% achieved in FY18 and FY22, versus 9.5% achieved between FY08 and FY17, no thanks to declining margins of its residential projects and the pandemic.
Lee does not expect residential margins to improve. As such, to improve returns, UOL can undertake more share buybacks, which the controlling Wee family has been doing. It can also sell non-core assets, such as its hotels in China and “niche” malls in Singapore.
UOL can consider recycling its core assets into a REIT, and with a stronger recurring income base, give a higher dividend payout at a ratio of 60 to 80%, versus 40-50% paid now.
Lee’s revised target price of $9.08 is tied to 46% of UOL’s RNAV discount and 0.6x price to book.
