9M16 CNP of RM278m was within expectations while sales surprised on the upside at RM1.15b (96% FY16E target). No dividends as expected. Being the only developer to enjoy pure exposure in KL while rolling out a pipeline of urbanbased affordable priced products will provide it an edge to generating stronger sales. Furthermore, this net cash developer offers an attractive yield of 6.3%. Upgrade to OUTPERFORM with unchanged TP of RM2.54.

Sales beat expectations. 9M16 CNP of RM278m was within expectations at 75% of streets’ and 71% of our FY16E estimates. 9M16 sales was at RM1.15b (+62% YoY) which exceeded our expectations as it comes in at 96% of our FY16E target of RM1.20b; main drivers were United Point@Kepong, Sentul Point and Danau Kota. No dividends announced, as expected.

Lower billings compensated by superior margins. After stripping out its FV adjustments of RM55.5m, 3Q16 CNP fell by 54% QoQ as gross development margins normalized to 45.8% after 2Q16 highbase effect as the previous quarter saw project completion (Desa Green). Administrative/general expenses were also up by 27% QoQ to RM47.0m, arising from higher sales commissions. YoY, 9M16 CNP was lower by 9% largely as lower billings dragged down revenue by 36% but was partly compensated by higher EBIT margins of 52.6% (+13.1ppt) due to the reasons mentioned above. The company remained in a net cash position of 0.13x.

Looking brighter than the rest. UOADEV benefited from their pure positioning in Kuala Lumpur while churning out ‘affordable’ priced products at RM400-500k/unit. Furthermore, their United Point project is next to a KTM station, i.e. connectivity play. The group does not have any major launches for 4Q16 as most was done in 9M16 and thus, they expect 4Q16 sales to be weaker than previous quarters. Launches for FY17 include Desa Business Suites (RM300m), The Sphere@Bangsar South (RM1.20b and likely in phases over 1-2 years), and the affordable homes@Selayang (RM90m).

Raise FY16-17E earnings by 1-3% as we raise corresponding sales targets by 16-5% to RM1.38-1.41b. Unbilled sales of RM1.51b provides between 1–1.5 years visibility.

Upgrade to OUTPERFORM (from MP) with unchanged TP of RM2.54 based on 36% discount (+1SD to its mean) to its FD RNAV of RM4.00). Given the recent drop in share price due to market selldown, we reckon it is now a good accumulation opportunity for this defensive developer. At our TP, its FY16E net yields are at 5.9% (current yield: 6.3%) which is slightly better compared to sizeable MREITs’ average net yield of 5.3%. Against a weak sector backdrop, we believe UOADEV is one of the better bets, due to its pure KL exposure with connectivity plays, high development margins and a strong net cash position.

Downside risks to our call include weaker-than-expected property sales, margin issues, negative real estate policies, and tighter lending environments

Source: Kenanga Research - 24 Nov 2016