News  UOA announced that it had entered into an agreement to dispose off Tower 1, Avenue 3, which is a 12-storey office at The Horizon, Bangsar South for RM72.54m or RM930psf (gross area) to Marak Moden Sdn Bhd. The building is held under UOA’s property, plant and equipment as it is the group’s HQ. Expected gains on disposal is RM48.2m.

Comments  The sale price is attractive at RM930psf vs. earlier disposals such as (i) Tower 1, Avenue 7, Horizon Phase 2 @ Bangsar South for RM750psf to UEM Group back in Dec-12 and (ii) sale of inventory in 1Q13 which we estimated is done close to RM800psf. This is because the asset is fully tenanted with a sale-and-leaseback arrangement. Additionally, it forms part of Phase 1, which has a more prime frontage.

 We did expect the group to register en bloc sale although we had anticipated it in early FY14 rather than end FY13. Nonetheless, it is a positive surprise, especially since the gains on disposal imply a margin of 66%. In light of Klang Valley’s office oversupply situation and Budget-2014 measures, the en bloc deal at an attractive price is a commendable and speaks volumes of Bangsar South’s success.

Outlook  The group has two more en bloc offices in its inventory for sale in Bangsar South, although we are unclear if these sales will take place in 2014; hence we have not imputed for these two en bloc office sales as yet.

Forecast  Raise FY13E core earnings by 4% as the sale was made in FY13 (refer overleaf).

Rating Upgrade to OUTPERFORM (from MP)

Valuation  The stock has recently taken a sharp beating and has retreated by some 7% over the last two weeks. At current price, the stock is trading at a steep 49% discount to its FD RNAV. We believe this is unwarranted as most of the property stocks have reacted and priced-in Budget-2014 measures in Nov-

Dec 2013. UOA has low borrowings and is deeply in a net cash position, which more than supports its ability to pay out an estimated NDPS of 7.0 sen each for FY13 and FY14. More importantly, at this level the net dividend yield is a compelling 7.0%, which is better than sizeable MREITs or most developers, while its FY14E PER of 6.8x is lower than its historical average of 7.4x.

 We maintain our TP of RM2.10 based on 43% discount to its FD RNAV of RM3.67. Our TP also implies strong net yields of 6.2%.

Risk to Our Call  Sector risks, including weaker sales, negative policies and disappointing dividends.

Source: Kenanga