• Cut to NEUTRAL from Buy, new TP of MYR1.86 from MYR1.90, 6% upside with c.6% FY23F yield. UOA Development’s 1Q23 results missed expectations, as 1Q is typically its weakest quarter. Meanwhile, 1Q23 property sales amounted to MYR124.1m, and we expect this metric to be much stronger in the coming quarters due to the timing of pipeline launches, including that for Vertical strata office and Bamboo Hills Residence. Our lower TP also reflects our new ESG score, post adjustment in ESG weightage. Given the lesser upside, we downgrade our stock rating.

• 1Q23 results. Revenue contracted QoQ as progress billings were slower vs 4Q22. Note that ongoing projects such as Laurel Residence and Aster Hill, as well as the sale of unsold units from The Goodwood Residence and United Point Residence were the main contributors to turnover. Income from rental and hospitality services grew by 46% YoY, and its EBIT margin still hovered around 55-60%. UOAD’s net cash pile of MYR2.21bn will come in handy for future landbanking activities, as well as the construction of its upcoming office building project.

• Decent sales in 1Q23. 1Q23 property sales reached MYR124.1m, vs MYR158.2m in 4Q22. Key contributors were The Goodwood Residence (MYR56.5m), Aster Hill (MYR33.1m), Laurel Residence (MYR20m), and United Point Residence (MYR11m). As at 1Q23, Laurel Residence is 49% sold (from 46% in 4Q22), while The Goodwood Residence has 15-20% of all units unsold.

• More active launches in 2H. Laurel Residence and Aster Hill (the latter was launched in end-February and is 8% sold) should be UOAD’s key sales drivers in 2Q. In 2H, management plans to roll out its Vertical office project in Bangsar South (GDV: MYR1.3bn). About a third of the floor space will be put up for sale as small strata office units, and the balance retained as investment property. Bamboo Hill Residence at Jalan Ipoh will be the last project for this year, and its maiden launch is scheduled for 4Q23.

• Estimates and valuation. We maintain our FY23-25 earnings forecasts. While Laurel Residence and Aster Hill are still at the initial stage of construction, we expect the company’s earnings to be slightly stronger in the coming quarters, given its launch pipeline. Unbilled sales rose to MYR226.3m in 1Q23, vs MYR203.4m as at 4Q22. Our TP is based on a 40% discount to RNAV with a 2% ESG discount inked in, as UOAD’s new ESG score of 2.9 is slightly below the country median of 3.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 23 May 2023