• UOA Development (UOAD) reported results above market expectations but within ours. Net profit jumped 24% yoy to RM356m in 9M20, mainly due to the recognition of a gain on disposal of UOA Corporate Tower (UOA CT).
• UOAD achieved slower sales of RM234m in 9M20 compared to RM583m in 9M19 due to weak market sentiment and lockdown disruptions in 1H20.
• Attractive 2020E net yield of 9.3% and strong balance sheet with estimated net cash of RM0.96/share post-disposal. UOAD remains one of our top sector BUYs with a TP of RM2.34, based on a 30% discount to RNAV.

Fair Value Gain for Proposed UOA CT Disposal

Net profit of RM356m in 9M20 comprises 81% of our full-year forecast of RM440m but exceeded the consensus estimate of RM333m. We expect earnings to normalise in 4Q20 following the fair value gain of RM114m and positive tax adjustment of RM34.2m for the proposed disposal of UOA CT recognised in 3Q20. We believe the gain was not reflected in the consensus forecast. The disposal of UOA CT for RM700m to UOA REIT is expected to be completed by end-2020, but UOAD recognised the fair value gain in 3Q20 to mark-to-market the investment property. The RM700m proceeds will lift its net cash to RM1.89bn or RM0.96/share.

Slower Progress Billings

Revenue fell 26% yoy to RM651m in 9M20 due to lower progress billings for United Point Residence and Sentul Point Service Suites, and lower sales of inventories. Gross profit declined at a slower rate of 15% yoy to RM289m in 9M20, mainly due to the cost adjustment for the United Point Residence project, which improved blended gross profit margin to 44.4% in 9M20 compared to 38.8% in 9M19. Net profit surged 8-fold qoq to RM209m in 3Q20, mainly due to the UOA CT gain. Excluding the gain, operational earnings grew 2.6-fold qoq to RM60.6m in 3Q20 from a low base in 2Q20, which was impacted by the Movement Control Order disruptions.

Attractive Yield

We maintain our earnings forecasts assuming a sequential earnings improvement in 4Q20 as progress billings pick up. UOAD did not declare dividends this quarter as it usually declares a first and final dividend in June the following year. We expect a higher dividend payout with the earnings recovery, giving an attractive net yield of 9.3% in 2020E. We maintain our BUY call with a RM2.34 target price, based on a 30% discount to RNAV. Key risk: slower-than-expected recovery in property sales.

Source: Affin Hwang Research - 26 Nov 2020