UOADEV’s share price plunged 6.7% last Friday. Our channel checks with management indicate no major negative news over the horizon. However, ahead of its 3Q17 results and potential push-back in certain launches, we conservatively tone down our FY17E sales target by 12% which resulted in a 2% reduction in FY18E CNP. Even so, the sell-down is unwarranted given decent Fwd. PER of 10x and compelling yield at 6.4%. Upgrade to OUTPERFORM with a lower TP of RM2.47.

Share price plunges. Last Friday, UOADEV share price plunged 6.7% to a new YTD low of RM2.35 on the back of 4.16m shares volume vs. the 3-month’s average share volume of 0.70m and weighed average price of RM2.56. We contacted the management and it appears that there are no major news or corporate developments. Meanwhile, around the corner is the 3Q17 reporting season. Note that 1H17 sales of RM613m made up 43% of our FY17E target of RM1.42b while 1H17 CNP of RM209m accounted for 55% of street’s and full-year estimates.

Expecting sales to catch-up in 2H17. United Point Ph 3 (RM500m) and Sentul Point Ph 3 (RM500m) have been released for sale and takeups will be visible in 3Q17 figures - these projects should fare relatively well as their initial phases have done well. Meanwhile, South Link (RM550m) has commenced registration and launch is expected soon. Other launches for the year will be the affordable housing at Selayang (GDV RM90m) and Bandar Tun Razak, Cheras (RM300m) although sales may spill over into 2018 as timing of launch could be close to year-end. Earnings-wise, 3Q17 should meet our expectations because we anticipate completion of Southbank by 2H17; but we do expect 3Q17 CNP to be lower QoQ due to 2Q17 high base effect due to three projects’ completion that quarter.

Potential push-back in launches. Hence, we are scaling back our timeline of launch for Bandar Tun Razak, Cheras project, resulting in 12% reduction in our FY17E sales target to RM1.25b while FY18E target is maintained at RM1.42b. Correspondingly, there is no impact to FY17 CNP while FY18E CNP is lowered by 2%, which is not overly significant as we expect more substantial recognition period of Bandar Tun Razak to only take place by FY19. Our FY17-18E DPS remains at 15.0 sen at a pay-out ratio of 64% each (FY16: 65%). The group is expected to remain in a net cash position.

Unwarranted sell down. Based on stable fundamentals and even after accounting for potential risks in delays of new launches, UOADEV is only trading at 10x Fwd. PER which is in in-line with its historical average. It enjoys defensive attributes such as; (i) pure KL exposure with connectivity plays, (ii) high margins, (iii) net cash position, and (iv) a more prominent recurring income stream from its hospitality and property investment assets. This is reflected in its ability to provide compelling yields of 6.4% which now offers more than 1ppt buffer spread to a less risky sizeable MREIT net yields of c. 5.1%.

Cautiously toning down TP to RM2.47 (from RM2.63) based on wider 40% discount (+0.5SD levels) to its FD RNAV of RM4.11 (previously discount of 36% @ +1.0SD levels). Although we think that RNAV discount level of +1.0SD is fair given that most of its landbanks are realizable in the near to medium term and it also has one of the industry’s highest margins and dividend yields, we think that heightened sensitivity amongst today’s investors with regards to weaker than expected sales trajectory must be considered. We will review our RNAV discounts if sales are better than expected. Nonetheless, the price pullback is too severe and even with a lower TP, this warrants an upgrade to OUTPERFORM (previously MARKET PERFORM).

Risks include weaker/stronger-than-expected property sales, margin fluctuations, and changes in real estate policies and/or lending environments.

Source: Kenanga Research - 23 Oct 2017