KEY INVESTMENT HIGHLIGHTS

• Disposing UOA Corporate Tower to UOA REIT for RM700m

• Disposal gain of RM114m

• Special dividend of 1sen per share

• Disposal gain to boost earnings in FY20

• Earnings estimates maintained

• Maintain BUY with unchanged TP of RM2.12

Disposing UOA Corporate Tower to UOA REIT for RM700m. UOA Development (UOADEV) announced that it has signed a conditional sale and purchase agreement (SPA) to dispose UOA Corporate Tower in Bangsar South to UOA REIT for a cash consideration of RM700m. Note that UOA Corporate Tower is a 38-storey office building with net lettable area of 732,871 square feet and occupancy rate of 93%. The proposed disposal is expected to be completed in 4Q2020.

Positive on the disposal. We view the disposal positively as UOADEV is expected to reap disposal gain of RM114m from the proposed disposal as disposal consideration of RM700m is higher than net book value of UOA Corporate Tower of RM586m. UOADEV intends to utilize 92% of the proceeds from disposal for development of investment properties. We think that would allow UOADEV to strengthen its healthy balance sheet of net cash position without incurring higher borrowings for development of investment properties in Bangsar South and Jalan Ipoh.

Special dividend of 1sen per share. UOADEV intends to utilize RM21.2m or equivalent to 3% of proceeds from disposal for special dividend. That translates into special dividend of 1sen per share which is expected to be distributed within 9 months after the completion of the proposed disposal. The special dividend of 1sen per share implies dividend yield of 0.6% based on last closing price of RM1.59.

Disposal gain to boost earnings in FY20. Earnings in FY20 are expected to be boosted by the disposal gain of RM114m. Nevertheless, we make no changes to our FY20 earnings forecast as disposal gain is excluded from our core net income forecast. Meanwhile, UOADEV is expected to incur rental expenses of RM7.3m per annum going forward as certain subsidiaries of UOADEV are tenants of UOA Corporate Tower. The rental expenses are minimal at <3% of our FY21 earnings forecast. Hence, we make no changes to our earnings forecast for FY21.

Maintain BUY with unchanged TP of RM2.12. We maintain our BUY call on UOADEV with unchanged TP of RM2.12, based on 28% discount to RNAV. We continue to like UOADEV for its strategy of focusing on urban based properties within Klang Valley and healthy balance sheet.

Source: MIDF Research - 29 Sept 2020