1Q15 sales are likely to be weak although this is well expected as the industry is banking on a better 2H15. UOADEV is actively reviewing its product pipeline for the year and has decided to change its launch plans. Desa Business Suites will likely be pushed to FY16 while the group is ramping up Kepong V (launch in 3Q15) significantly by increasing the launch size from RM300.0m to RM1.0b, to capture the more resilient demand in the ‘affordable homes’ segment. Including their inventories and unsold WIPs, our FY15E sales estimates of RM1.3b implies an effective take-up rate of 50.0%, which we feel is conservative enough for current market conditions. 1Q15 earnings could turn out weak to ‘broadly inline’, but 2H15 earnings will compensate for this through huge billings recognition since 3-4 projects will be completed by year-end. Thus, no changes to earnings forecasts. Maintain MARKET PERFORM but with a higher TP of RM2.10 (from RM2.00) based on a narrower discount of 45.0% to its FD RNAV of RM3.75. Although total returns are <3.0%, the current market conditions would lean investors towards defensive, yielding (5.9% net yield) and strong balance sheet companies.

Launch plans have been changed. 1Q15 sales are likely to disappoint vs. our FY15E target of RM1.3b. The group is reviewing its launch plans. Initially, we were guided that they will launch three new projects worth GDV of RM720.0m namely Desa Business Suites (RM300.0m), Kepong V-Ph1 (RM300.0m) and North Kiara Boulevard (RM120.0m). Now, Desa Business Suites will likely be pushed to FY16 while they ramp up Kepong V launches up to RM1.0b. Kepong V has gained a lot of interest due to the DUKE highway extension frontage while there is a proposal for a KTM station with ‘Park & Ride’ facilities. So FY15 new launches will likely amount to RM1.1b and if we add their remaining inventories/unsold WIPs of c.RM1.5b, our FY15E sales of RM1.3b implies an effective take up rate of 50.0%, which we feel is conservative enough under current market conditions. As for the Jalan Ipoh project, the group is positioning it as their next Bangsar South City (BSC), while we do expect the project’s GDV to increase significantly from current guidance of RM3.0b, launch is likely towards mid-2016,

1Q15 earnings could be weak to ‘broadly inline’, but 2H15 earnings will compensate. Besides 1Qs being typically shorter working quarters, we are also anticipating strong billings by 2H15 or 4Q15 because of the completion of Vertical Offices, Scenaria and potentially Desa Green. We are confident of our FY15E revenue of RM1.2b because these projects make up RM0.9b or 45.0% of 4Q15 unbilled sales of RM2.0b. Their 39.0% associate project, Kencana Square, is also expected to be completed this year. Meanwhile, gross margins are likely to remain stable at 43.0%. Thus, we maintain our estimates while dividend estimates remain intact, implying net yields of 5.9%. Note that the company will pay out its 13.0 sen NDPS for the year FY14 in Jun/July 2015, pending the company’s AGM, while we expect the DRP to be applicable. The group remains in a net cash position.

Maintain MARKET PERFORM but with a higher TP of RM2.10 (from RM2.00) based on a narrower discount of 45.0% (47.0% previously) to its FD RNAV of RM3.75. Our applied discount is a slight premium to our big-cap developers’ average applied discount rate of 50.0%. We view UOADEV as a defensive developer given its strong net cash position, very rich margins and conservative approach. Our views are affirmed since their YTD gains of 4.3% have beaten the KLPRP’s 3.8%. Our TP implies FY15E net yield of 6.2% which is a decent premium to sizeable MREITs’ average net yields of 4.9%. While we view UOADEV as a defensive developer, its earnings profile is still relatively more volatile than MREITs, and thus, requiring more than a 1ppt spread to MREITs’ yields. While our TP implies less than a 3.0% 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.

A very slow start to the year. We met up with management to get their views on the current property market conditions. Although management has not given us official sales figures, it appears that 1Q15 sales will likely be weak and may come below our expectations. Noticeably, YTD, we have not seen any major new launches from the group. To recap, we are estimating FY15 sales of RM1.3b (-19.0% YoY). We were not surprised considering the tighter lending liquidity while buyers’ sentiment had already weakened. UOADEV is banking on a stronger 2H15, which is inline with our sector view.

Launch plans have changed. Initially, the group had guided that they will launch three new projects worth GDV RM720.0m; Desa Business Suites (RM300.0m), Kepong V-Ph1 (RM300.0m) and North Kiara Boulevard (RM120.0m). Note that the group has c.RM1.5b worth of inventories and unsold on-going projects. Now, they may hold back on Desa Business Suites as they want to sell the project on a completed and en-bloc basis, which means they will have to wait for completion next year.

Revving up Kepong V. Instead, they are ramping up on Kepong V launch size to potentially RM1.0b (condo, shops, retail) because there are strong enquires due to its frontage to DUKE highway extension (on-going) and their proposal for a KTM station with ‘Park & Ride’ facilities. Besides Kepong V, the group is mulling over launch of Desa Sentul Phase 2 since Phase 1 has achieved a commendable c. 85.0% take-up to date since its official launch in 3Q14. If market conditions improve and timing of the rumoured hypermart (across the road from Desa Sentul) firms up, UOADEV may consider launching 40.0% of Desa Sentul- Phase 2 (GDV: RM1.5b) or RM600.0m this year. Excluding Desa Sentul-Phase 2 and Desa Business Suites, the group is likely to launch a GDV of RM1.1b over FY15 and in addition to the inventories/unsold on-going projects, our FY15E sales of RM1.3b implies an effective take up rate of 50.0%, which we feel is conservative enough under current market conditions.

Jalan Ipoh, the next Bangsar South City (BSC) for UOADEV? The freehold land spans over c. 30ac, fronts DUKE highway and has an estimated GDV of RM3.0b. The land can be divided into two parts, of which approvals are in place for the first 20ac while approvals are pending for the remaining land. We gather that the group is trying to seek for higher plot ratio and is planning a very similar but improved version of BSC, especially as they have recently obtained the approval-in-principle for the DUKE Highway access, implying there is a possibility that the entire project GDV could increase significantly to RM5.0b. If so, this will increase our FD RNAV by 6.0% to RM3.97. However, we will hold back from increasing the project’s GDV, pending confirmation from the company. Launch will likely be in mid-2016 with a project duration of 7-8 years. Recall that BSC started off with an initial GDV of RM3.0b back in 2007/09. Now BSC has a potential GDV of RM8.0b-RM10.0b due to the value enhancements.

Source: Kenanga Research - 30 Apr 2015