UOADEV is acquiring 9.4 ac freehold land in Sri Petaling for RM61.1m which we think is decent land pricing. The mixed development will have a GDV of RM1.0b. Impact to its net cash position is minimal. Launch is likely towards FY19. No change to earnings. Raise TP to RM2.60 but maintain MARKET PERFORM as this defensive developer’s yield (5.7%) is on par with sizeable MREITs’ net yields (5.8%).

Buying land in Sri Petaling. UOADEV is acquiring 9.4 ac freehold land in Sri Petaling for RM61.1m (RM149psf). We gather that it will be for a mixed development with emphasis on residential with RM1.0b GDV. Note that this is UOADEV’s second project in the area, following their successfully completed and sold Le Yuen. The land is opposite Le Yuen and is on the other side of MEX highway and in close proximity to the proposed MRT station.

Decent land price. There have not been many identical transactions in the area although we note there are detached plots transacted between RM110-RM165psf. Based on the GDV guidance, the land cost to GDV ratio is at 6%, which implies gross margins of c. 45% or very much in line with UOADEV’s projects. Impact to the balance sheet is minimal as FY18E net cash position will reduce to 0.02x (from 0.03x). The land is made out of 13 contiguous but different plots where only some parcels have D.O. Thus, timeline to launch is likely towards end FY18 to FY19. While details on the project (e.g. ASP) are not available, we gather that management intends to keep unit pricing between RM500-800k/unit, which we think is digestible by the market.

Increasing pipeline of recurring income. For FY18, UOADEV has lined up RM1.37b worth of new launches for sale. The group’s inventories have hit a record high of RM1.0b (at cost) – but we estimate a market value of about RM2.0b; while this may look alarming, UOADEV has very strong holding power and had demonstrated its ability to realize its inventories at the ‘right time’. Notably, there is more emphasis on recurring income. Over 2018, the group plans to commence works on Bandar Tun Razak, Cheras (age-care facilities, RM300m GDV) and South Point, Bangsar South (RM220m GDV) but are likely to keep it for recurring income purposes. UOADEV’s investment properties in the books are at RM1.67b and rental income streams constitute close to 40% of the group’s EBIT.

No changes to earnings, as the group is likely to switch drivers around for FY19 as the Jalan Ipoh project may be held back further from launching.

Higher TP of RM2.60 (from RM2.50) after applying an unchanged FD RNAV discount of 40% (+0.5SD levels) to an increased FD RNAV of RM4.28 (from RM4.20) after factoring in the Sri Petaling project. We think our valuation level is fair considering its defensive attributes such as; (i) pure KL exposure with connectivity plays, (ii) high margins, (iii) net cash position, (iv) a more prominent recurring income stream from its hospitality and property investment assets, and (v) a dividend yield of 5.7% which is on par with the sizeable MREITs’ average dividend yield of 5.8% (a less riskier property proxy compared to developers). Hence, we reiterate MARKET PERFORM. While we believe this may be a ‘flight to safety’ stock considering its defensive qualities, investors may want to consider cheaper entry levels.

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

Source: Kenanga Research - 26 Feb 2018