• UOA Development (UOAD) looks to complete the proposed sale of UOA Corporate Tower (UOA CT) to UOA REIT for RM700m cash by end-2020.
• We raise our 2020E core EPS by 27% mainly to reflect the UOA CT disposal gain and raise our 2020E net DPS by 25% to RM0.15 as we expect UOAD to reward shareholders following the monetisation of a major asset.
• Attractive 2020E net yield of 10.3% and strong balance sheet with estimated net cash of RM0.82/share post-disposal. UOAD remains one of our top sector BUYs with a higher TP of RM2.34, based on 30% discount to RNAV.

Substantial Gain on Disposal of UOA CT

UOAD proposed to dispose UOA CT to UOA REIT (UOAR MK – N-R) for RM700m cash and the transaction is expected to complete by end-2020. UOAD will utilise the cash proceeds for developing new investment properties, working capital and pay a special dividend of RM0.01/share. It has earmarked 92% of the total proceeds or RM646m to develop new investment properties, ie, District K in Jalan Ipoh, UOA Business Park (Phase II) in Shah Alam, Lot 2507 in Kerinchi and V50 in Bangsar South. UOAD will recognise a one-off net gain of RM147.7m on the proposed disposal, which we factor into our 2020E earnings.

Focus on Existing Projects

Given the current weak property market conditions, we understand that UOAD will focus on selling the unsold units of ongoing projects and not launch any new projects in 2020. UOAD achieved weak sales of RM142m in 1H20 due to the government’s Movement Control Order (MCO). We gather that sales have picked up with new sales of over RM100m in 3Q20 and bookings of over RM100m. We forecast sales of RM432m in 2020E and RM445m in 2021E.

Higher Dividends in 2020E

We lift core 2020E EPS by 27% to 22.4 sen to reflect the UOA CT disposal gain, partly offset by lower hospitality and rental income. But we cut core EPS by 15-18% in 2021-22E to reflect the loss of rental income from UOA CT and lower property development profit margins. We believe UOAD will increase net DPS to RM0.15 (including the special DPS of RM0.01) in 2020E from RM0.14 in 2019 as net profit is expected to grow 10% yoy in 2020E, assuming it maintains the high dividend payout ratio of 66-67%. We raise our RNAV/share to RM3.35 from RM3.26 previously to reflect the higher valuation for UOA CT. Based on the same 30% discount to RNAV, we raise our TP to RM2.34 from RM2.28 previously. Maintain our BUY call.

Source: Affin Hwang Research - 27 Oct 2020