Citi Research analyst Brandon Lee has kept his “buy” call and target price of $9.08 on UOL Group after Singapore Land Group U06 , UOL’s 50.4%-owned subsidiary, announced the partial redevelopment of Marina Square on Sept 18. Lee's target price is set at a 30% discount to its RNAV of $12.97.
Singapore Land Group says it is working on more details to obtain the necessary approvals from the relevant authorities, but the timeline has not been determined, notes Lee in his Oct 1 report.
“We (and likely investors also given consistent questions regarding this topic) are not surprised by given UOL’s and SLG’s proven track record of asset redevelopment in Singapore, like Clifford Centre, Odeon Towers/KH Kea Building and Faber House,” says Lee in his Oct 1 report.
He adds that the timing of the announcement came as a “pleasant surprise” given that UOL had previously said that any potential redevelopment would be a “long-drawn-out process”.
However, the latest announcement seems to be in line with the group’s recent move to review its portfolio with a view to unlocking value.
“Combined with an increased openness to bring in joint venture (JV) partner(s) to tap on their expertise/network, we believe its discount to revalued net asset value (RNAV) could narrow from here,” says Lee, adding that the redevelopment could yield a “decent” RNAV accretion of 4% to 6%.
“Assuming plot ratio expansion of 25% (from existing 3.4x to 4.3x, in-line with 4.1x - 4.6x of nearby projects – Suntec City, South Beach, Guoco Midtown and Bugis Junction) for Marina Square shopping mall site and three potential mixed-use redevelopment schemes (with mix of office, residential, retail and/or serviced residences components), we estimate [a] gross development value (GDV) of $3.8 billion - $4.3 billion, profit before tax (PBT) margin of 21% - 31% and RNAV accretion of 4% - 6%,” he adds.
“We believe cost savings can be achieved by bringing in JV partners (like CapitaLand Development for its recent mixed-use site at Tampines Avenue 11) and/or doing without land tenure top-up for the non-residential components,” he continues.
Marina Square is a 99-year leasehold mixed-use development along Raffles Boulevard with 56 years left on the lease. It has a total gross floor area of 3.4 million sq ft comprising the 37-year-old Marina Square shopping mall as well as three upscale hotels – the 790-room Pan Pacific Singapore, the 538-room Parkroyal Collection Marina Bay and the 510-room Mandarin Oriental. All components of the development were first completed between 1986 and 1987.
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UOL owns a 22.7% stake in Marina Centre Holdings (MCH) while Singapore Land Group owns 77.3% in MCH. MCH, in turn, owns 100% stakes in the mall and Pan Pacific Singapore, as well as a 75% stake in Parkroyal Collection Marina Bay. MCH also owns a 50% stake in Mandarin Oriental. UOL owns the remaining 25% stake in Parkroyal Collection Marina Bay.
As such, UOL owns respective effective stakes of 62% in the mall, 62% in Pan Pacific Singapore, 71% in Parkroyal Collection Marina Bay and 31% in Mandarin Oriental.
“UOL and City Developments (CDL) are the most direct proxies to [the] Singapore property sector, in view of their respective 84% and 51% exposure,” he writes. “Our target price for CDL is currently pegged at a marginally lower 25% discount to its RNAV (due to relatively higher geographical diversification), similar to where it traded at during the past few global downcycles.”
In addition, Lee expects UOL to benefit from a “decent” take-up for two of its residential launches in 2023 as well as expectations of more redevelopments of its aged commercial properties.
The key downsides, in his view, are an expansion of cap rates as interest rates rise, a sharp economic slowdown, a fall in tourist arrivals, and a prolonged period of existing cooling measures.
As at its last-closed share price of $6.42 on Sept 29, UOL, which is down by 4% year-to-date (ytd), has outperformed Singapore developers, whose shares are down by 16% over the same period.
At present, UOL’s valuations remain cheap as it is trading at a 51% discount to its RNAV and 0.52x P/B, says Lee.
As at 4.46pm, shares in UOL are trading 2 cents lower or 0.31% down at $6.40.
