We downgrade the stock to Neutral with a lower fair value of MYR2.48. Although the new land is positive to RNAV, even if BNM may not abolish the DIBS over the short term, we think the reversal in liquidity flow and rising bond yields are enough to dent investors’ sentiment. In addition, the sector may not outperform the market in 3Q given its outperformance in 1H.

- New land at Jalan Ipoh. As expected, UOAD remains focused on the Klang Valley property market. It is acquiring an additional 11.1 acres piece of freehold land at Jalan Ipoh at a purchase consideration of MYR130.3m. Some parcels are currently occupied by squatters, and it will be the vendor’s responsibility to relocate the squatters upon delivery of the land. The acquisition is expected to be completed in 2Q2014. 

- At reasonable cost. The land is actually adjacent to UOAD’s existing 16.8-acre land at Jalan Ipoh. The new land is acquired at a cost of MYR270 psf, compared to MYR123 psf for the previous parcel, which was purchased two years ago. The blended average land cost for the combined landbank is, therefore, MYR181 psf. With this additional 11.1 acres of land (483,323 sqf), the GDV of this integrated mixed development is boosted to MYR3bn, from MYR1.75bn.   

- Turning cautious on the sector. The sector has been recently hit by the market speculation that BNM could abolish the DIBS (Developers’ Interest Bearing Scheme) soon by stopping the banks from participating in the scheme. Although BNM may not implement the measure over the short term as economic growth has slowed in 1Q, and US QE tapering has affected global financial markets and tightened market conditions, we believe the reversal in liquidity flow and rising bond yields are enough to dent sentiment on the sector. Considering that the KLPRP index has appreciated by 27% vs. KLCI’s 2.3% YTD, the sector may unlikely outperform the market in this coming 3Q.  

- Forecasts. Unchanged. As the project is expected to be kicked off only in 2H2014, impact on earnings will start only in mid FY15 onwards.   

- Valuations. Although the new land is positive to RNAV, we raise our discount to RNAV to 20% (from 10%) due to our cautious view on the sector. FV is now lowered to MRY2.48. We downgrade UOAD to Neutral.

Source: RHB