Period  3Q14/9M14

Actual vs. Expectations 9M14 core net profit of RM191m was below expectations; at 68% of our, and 65% of street’s, fullyear estimates. The main disappointment arose from higher-than-expected expenses relating to new projects, A&P costs and pre-opening hospitality costs.

 For 9M14, UOAD registered sales of RM1.37b which makes up 86% of our FY14E target of RM1.60b. We consider this as broadly within given our expectations of a weaker 4Q14.

Dividends  None, as expected.

Key Results Highlights QoQ, 3Q14 core earnings was significant higher by 138% on the back of 60% increase in revenue. Property billings were significantly higher as the group:

(i) booked-in a lumpy sale of Scenaria of RM200m in 3Q14 where construction progress is already at 35%,

(ii) completion of Le Yuan. Pretax margins (ex-FV) also expanded by 16.0ppt to more ‘normalized levels’ of 45.6% as the last quarter was affected by new project start-up costs (e.g. Southbank/Sentul Village), higher A&P expenses, hospitality pre-opening expenses (e.g. Capri & Nexus @ Bangsar South).

 YoY, 9M14 core earnings was down by 19% given the high-base effect in previous comparable period which saw RM226m worth of en-bloc office inventories, which carries very rich margins and flows directly to the bottom line. This year was also affected by costs as highlighted above.

Outlook  We do not expect any new launches in 4Q14 as the group will concentrate of converting its booking sales into SPA (e.g. Southbank, Sentul Village).

 Key launches for FY15E are Desa Business Suites, Desa Sentul (P2), Kepong V (P1) and Kiara V, amounting to a total GDV of RM2.23b. They also intend to lease out Vertical Corporate Towers @ Bangsar South (valued at RM1b) as part of their ambitions to grow their recurring income streams. There is no guidance for FY15E sales target, although we are inclined to tone it down, resulting in a flattish to declining YoY trend.

Change to Forecasts  Lowering FY14-15E core earnings by 5%-12% while dividends are lowered to 13.0 sen (5.9% yield) from 14.0 sen (refer overleaf). Unbilled sales of RM1.8b provide 1.5-2 years visibility.

Rating Maintain MARKET PERFORM

Valuation  Maintain TP of RM2.00 based on 46% discount to FD RNAV of RM3.69. We view UOAD as a defensive developer given its strong net cash position, very rich margins and conservative approach. While our TP implies less than a 3% total return, we view that the market is likely to favour defensive stocks during challenging times. Thus, we recommend that investors hold on to the stock.

Risks to Our Call Unable to meet its sales target or better-than-expected sales/earnings. Unexpected en-bloc sales of office inventories. Sector risks, including further negative policies.

Source: Kenanga