UOA Development’s (UOAD) 2019 results were within market and our expectations. Net profit grew 5% yoy to RM399m in 2019, mainly due to a fair-value gain of RM32m. Core net profit fell 3% yoy to RM367m due to lower revenue (-13% yoy) and lower gross profit margin. UOAD achieved sales of RM787m in 2019, weaker compared to RM1.48bn in 2018. We cut our core EPS estimates by 17-20% in 2020- 21E to reflect weaker sales and a lower EBIT margin. 2020E PER of 10x and net yield of 7% are attractive. UOAD remains our top sector small-cap BUY with a lower TP of RM2.34, based on 30% discount RNAV.

Within Expectations

Headline net profit of RM399m (+5% yoy) in 2019 is close to consensus and our forecasts of RM384-387m. Revenue fell 13% yoy to RM1.1bn in 2019 due to lower sales and slower progress billings. Gross profit margin was reduced by 2.4ppt yoy to 37.4% in 2019 as cost of sales did not fall in line with revenue. However, other income grew 28% yoy, driven by higher rental and hospitality earnings. 4Q19 net profit was up 11% qoq but was down 18% yoy to RM113m, mainly due to the RM32m fair-value gain. Core net profit fell 24% qoq and 36% yoy to RM78m in 4Q19 on lower revenue and margin.

Strong Operating Cash Flow

UOAD stands out in the sector with strong operating cash inflow of RM590m (+93% yoy) in 2019. This was mainly driven by the reduction in inventories and receivables. We believe cash billings for its United Point and Sentul Point projects are accelerating as they are at 78-88% completion levels. As a result, net cash jumped 76% yoy to RM889m or RM0.45/share.

Lower Property Sales

UOAD recorded lower property sales of RM787m (-47% yoy) in 2019 with only one new property project launch as it was focused on clearing its unsold units. High unbilled sales of RM989m should shore up earnings in 2020-21E. It launched Aster Green Residence in Sri Petaling (RM250m gross development value) in 4Q19 with an encouraging take-up rate of 26%.

Maintain BUY

We cut our RNAV/share estimate to RM3.35 from RM3.77 previously to reflect lower DCF valuations for some projects assuming slower implementation and profit margins, partly offset by higher net cash. Based on the same 30% discount to RNAV, we reduce our TP to RM2.35 from RM2.64 previously. Maintain our BUY call. Key downside risk: weak property sales amidst prolonged property market downturn.

Source: Affin Hwang Research - 27 Feb 2020