Period  1Q14

Actual vs. Expectations 1Q14 core earnings of RM44.7m made-up 12% of both market consensus and our estimates. Although we had expected 1Q14 to be a weak quarter given the festivities, we regard this as only slightly below expectations as there was higher-than-expected pre-opening and start-up cost incurred for their hospitality division (Capri and Nexus at Bangsar South).

 1Q14 sales of RM336m accounted for 17% of our FY14E sales assumptions of RM2.0b. The major sales driver was South View Phase 2 (78% of sales). However, the slower 1Q14 was expected as there were no other major new launches during the quarter while the bulk of its launches will commence from 2Q14 onwards.

Dividends  None, as expected.

Key Results Highlights QoQ, revenue fell by 50% while core earnings fell by 61%.

EBIT margins eased by 2.5ppt to 39.1% due to the reasons stated above. Also, this quarter suffered from last quarter’s high-base effect as it recognized an en-bloc sale at The Horizon, Bangsar (sold to UEM Group) and saw completion of One@Bukit Ceylon.

 YoY, 1Q14 core earnings was lower by 61% as 1Q13 saw recognition of another en bloc sale of Horizon office (sold to PHB) and the reasons mentioned above.

Outlook  Although 1Q14 results were soft, management believes that billings will pick-up over the next few quarters as its new launches commences construction.

 For the next 9 months, the group will be launching RM1.74b worth of new projects while they have more than RM1.0b worth of unsold properties from on-going projects (excluding office en-blocs). The bulk of the new launches are likely to be priced at an average of RM600k-800k/unit, which is easily digestible considering that most of these projects are in prime matured residential areas of Klang Valley. We gather that the interest for South Bank @ Jln Klang Lama and Sentul Point are overwhelming and sales from these projects will be more visible in the next 2 quarters as the group will be securing SPA sales soon.

Change to Forecasts Lowering FY14E core earnings by 5% as we account for higher pre-opening and start-up costs for Capri and Nexus at Bangsar South. Unbilled sales of RM1.45b provides over one year’s earnings visibility.

Rating Downgrade to MARKET PERFORM from OP

Valuation  No changes to TP of RM2.25 based on 40% discount to its FD RNAV of RM3.69. We view UOA Development as a defensive developer given its strong net cash and attractive dividend yields compared to other large cap developers. We recommended OUTPERFORM on the stock when it was offering net yields of 7.5% (8/1/14 report) but since then, the stock has performed well with 13% YTD returns. Our TP implies net dividend yields of 6.2% or 0.7ppt higher than our average target net yields of 5.5% for sizeable MREITs. We believe the current spread is warranted for investors to take on higher ‘developer’s risks’, implying that we are comfortable with our TP. Thus, we downgrade UOA to MARKET PERFORM given total returns of 8.6%.

Risks to Our Call     Unable to meet its sales target. An up-cycle in Singapore’s property sector. Sector risks, including further negative policies.

Source: Kenanga