Period

2Q15/1H15

Actual vs. Expectations

1H15 core earnings of RM147m came in within expectations, making up 52% of our, and 48% of consensus’, estimates.

Sales for the period came up to RM504m which made up 39% of our FY15E target of RM1.3b. However, we deem this as broadly inline given that most of their launches will take place in 2H15.

Dividends

None, as expected.

Key Results Highlights

QoQ, 2Q15 core earnings fell by 12% despite the 4% increase in topline. This was due to lower development pretax margin, which saw 5.6ppt compression to 34.1% largely due to higher cost of sales and expenses from marketing activities. Positively, the group’s net cash position has improved to 0.09x from last quarter’s 0.07x.

YoY, 1H15 core earnings rose by 68% largely due to stronger property billings as Desa Green, Vertical Office, Scenaria, South View, Southbank and Desa Sentul are all at advanced construction stages and backed by healthy sales.

Outlook

New launches for FY15 include Kepong V (indicative launch size of RM1b GDV, future KTM station approved), Desa Business Suites (GDV RM300m), Setapak (GDV RM230m) and Suria@North Kiara (GDV RM120m). Note that the group has c.RM1.9b worth of unsold WIPs/inventories. Their next anchor project will be the Jalan Ipoh development (GDV: RM6.0b) which is scheduled for launching in FY16.

Change to Forecasts

No changes to estimates as we expect sales to pick up in 2H15 given their attractive launch pipelines. Unbilled sales of RM1.8b provide slightly more than 1.5 years visibility.

Rating

Upgrade to OURPERFORM

Valuation

Maintain TP of RM2.10 based on 47% discount to its FD RNAV of RM4.00. Our applied discount is inline with our sector’s average. We upgrade the stock to OP from MP as we are confident of its ability to meet its FY15E dividend obligations despite the tough market. However, we like their projects positioning, as all of its projects are in Kuala Lumpur and are largely priced within the sweet spot of RM500k-800k/unit. We are comfortable with our recommendation as we view UOADEV as a defensive developer given its strong net cash position (which does not include cash portion invested in shortterm investments, which amounted to RM881m) and very rich margins. Our TP implies FY15E net yield of 6.2%, which is decent, compared to sizeable MREITs’ average net yield of 5.3%. Current net yields imply 7.1%.

Risks to Our Call

Weaker-than-expected property sales

Higher-than-expected sales and administrative costs

Negative real estate policies

Tighter lending environments

Source: Kenanga Research - 21 Aug 2015