When you think of UOL stock, you will immediately relate them as the leading property developer in Singapore. However, UOL group deals more than just property development in Singapore. First of all, they develop properties over different geographical locations as well. Secondly, they hold a huge portfolio of high quality investment properties as well. In fact, they also own and manage over 30 hotels, resorts and serviced suites in Asia.
No doubt the travel restrictions caused by the Covid-19 pandemic has adversely affected the group’s hospitality business.
However, we have seen some price recovery from the market correction that began in March 2020 during the initial pandemic outbreak. So the question is, if you are holding the stock, should you sell? Or should you accumulate some if you haven’t invested? We will mainly use the FY2019 financial report to assess the normal operating condition. That’s because the pandemic-induced recession has affected its 2020 results negatively, especially for its hotel segment. Let’s check it out.
UOL Stock Business Overview
Source: UOL Group Financial Results First Half 2020 Presentation / Core Businesses
As discussed earlier, UOL deals more than just property development. It generates substantial incomes from its investment properties as well as its hotel operations. Note that the group has a 50% stake in United Industrial Corporation (UIC), which is also a publicly listed company in SGX. UIC also deals with property development, owns various high quality investment properties, as well as other property-related businesses.
Source: UOL Group Annual Report 2019 / Total Revenue By Geographical Segments
While the group has presence in Asia, Oceania, Europe and North America, its key business is focused in Singapore. Its Singapore business contributes nearly 70% of its revenue in FY2019. As such, we will focus the analysis more on its business in Singapore.
Source: UOL Group Annual Report 2019 / Status of Launched Projects
UOL is a reputable property developer in Singapore with a strong track record. Recently completed projects include The Clement Canopy, V on Shenton and Mon Jervois. The group continues to replenish its land bank to ensure a continuous pipeline for development projects.
For instance, in July 2019, UOL, together with UIC, bidded for a 16,543 sqm residential site at Clementi Avenue 1 for $491.3 million. The site, now known as Clavon, saw a very good take-up rate of more than 70% on its first day of sales launch in Dec 2020.
We can see that UOL is generally prudent when it comes to the price when bidding for lands to develop. The land cost is one of the most important element to ensure healthy sales take-up rates. This is critical because it directly translates to the selling price to end consumers.
Regulation In Singapore Property Market
This is critical especially in Singapore, given the tight regulation in the country’s property market. For example, developers are required to sell all the units in a project within 5 years from acquiring the land. Otherwise, they will need to fork out a hefty sum to pay for the Additional Buyer Stamp Duty of 25%. And we haven’t include the interest yet. Thus, developers may risk facing substantial losses if the units do not sell off within the 5 years time frame.
Therefore, given UOL’s track record in Singapore, I believe it can continue to prosper in its property development segment. However, investors should continue to monitor any regulatory move that can impact the group’s revenue. Understand that Singapore’s government monitors the property market very closely. In fact, July 2018 saw the 9th cooling measure to curb the rising property prices in Singapore. This has resulted in the rapid decline in UOL stock price back in mid 2018.
Source: UOL Group Annual Report 2019 / Total Assets By Geographical Segments
Again, observe that UOL’s assets in Singapore make up 83.9% of its total assets base. Given its concentration, we will take a look at some of the properties the group holds in Singapore.
Source: UOL Group Annual Report 2019 / Property Summary
Above table shows UOL’s investment properties in Singapore. The residential components are development projects discussed earlier. UOL accounted these assets under property development. The group’s main investment properties are in the retail malls, offices and hotels/serviced suites.
You can see that its real estate portfolio consists of high quality assets. For instance, their retail malls include Marina Square in the high traffic city area. Whereas, West Mall is located in the resilient suburban area. Its offices such as Clifford Centre, Singapore Land Tower and SGX Centre 2 are leased to high quality tenants. Both the retail and office segments generally register a high occupancy rate of about 95%. Even during the pandemic outbreak, there is only a slight decline in occupancy, as reported in its 2H 2020 results.
Source: UOL Group Financial Results First Half 2020 Presentation / Retail Occupancy
Source: UOL Group Financial Results First Half 2020 Presentation / Office Occupancy
The Pan Pacific and Park Royal brands are well known in the region. However, it has been adversely impacted by the lockdown and travel restrictions. And we expect the pandemic situation will continue to weigh on its hotel segment performance. The group’s hotel occupancy and revenue per available room (RevPar) saw a significant drop for the first half of 2020. See the chart below.
Source: UOL Group Financial Results First Half 2020 Presentation / Hotel Occupancy
UOL Stock Financials
Assets Breakdown By Business Segments
Source: UOL Group Annual Report 2019 / Total Assets By Business Segments
As discussed earlier, UOL holds substantial assets due to its portfolio of investment properties. Observe from the table above that its investment properties make up more than 56% of its assets. Its development projects and hotel operations are the other two key segments that contributed substantial asset bases. As for the group’s investment segment, it is mainly attributed to its stake in the securities of United Overseas Bank (UOB).
UOL Stock Financial Health
Source: UOL Group Financial Results First Half 2020 Presentation / Capital Management
Since UOL holds substantial real estate assets, a key measure to look at is the gearing ratio. This is a metric commonly used when examining real estate investment trusts (REITs). The group registered a gearing of 0.32 as of 1H2020. This is considered a very healthy level. There is no sign that the company is over leveraged. The group is also benefiting from the low interest environment, which saw its average borrowing cost reduced to 1.66%.
At the share price of $7.8 and its net tangible asset value per share of $11.29, it will translate to a price-to-book ratio of about 0.69. While it seems to be a good discount to the book value, the price-to-book ratio had been hovering around 0.65 to 0.75 for the past 5 years.
UOL Stock Earnings
Source: UOL Group Annual Report 2019 / Financial Highlights
We will use the financial results for FY2019, before the whole pandemic outbreak to assess UOL’s sustainable earnings.
Although the property development and hotel operations contribute most to the group’s revenue at 37% and 29% respectively, it is the investment properties that form the bulk of the profit. As we can see, investment properties contribute 58% to the group’s profit in FY2019.
It is worth mentioning that UOL’s investment segment generated about S$55.2 million of dividend in FY2019. This is equivalent to a 4.6% yield, and contributes 8% to the group’s profit.
Source: UOL Group Annual Report 2019 / Consolidated Income Statement
Notice the reported net profit attributable to equity holders was S$478.8 million for FY2019. At about 843 million shares outstanding, this will translate to earnings per share (EPS) of around S$0.57.
Notice that a substantial amount, S$220 million, of fair value gains on investment properties was added to the profit. However, gains from valuation does not exactly translate to earnings until the properties are liquidated. As such, you may want to discount this portion off to derive the group’s sustainable earnings. In fact, UOL reported this as the basic earnings before fair value and other gains/(losses) at S$0.372 a share for FY2019.
This can create quite a different valuation. Assuming a share price of S$7.5, and an EPS of S$0.57, we will get a P/E ratio ratio of 13. Conversely, using the latter EPS of S$0.372, P/E will work out to be about 20.
No doubt that in the long run, capital appreciation in the group’s properties can translate to actual gains, accounting for the full fair value gains can be overly aggressive. This can result in overvaluation of the company. We can observe this from the fair value losses of S$263.8 million from the group’s investment properties recorded in 1H2020.
Therefore, for long term investment, we can account for half of the fair value gains recorded in FY2019. This S$100 million fair value gain is equivalent to about 1% increase in valuation of its S$11.5 billion of investment properties. This should be a conservative estimate of the average yearly valuation gain on a long term basis. In short, we will use the average EPS, which works out to be S$0.47 a share, as the sustainable EPS.
To conclude, we think that UOL group continues to be a strong company, albeit its short term headwind from its hotel/serviced suites business segment due to the pandemic.
At the current price of around $7.70 a share, we feel it is fairly valued. This is based on a sustainable EPS of S$0.47 discounted by a weight average cost of capital of 6.14%.
If you are looking for a more stable investment, then perhaps UOL stock may be something to consider. Moreover, it’s giving about 2% dividend yield annually in the recent years. It is a strong company with small but stable growth. The group will be able to withstand economic downturns just like what we saw in 2020.
On the other hand, if you are looking for stronger growth elements, you may give UOL stock a pass. However, buying with a margin of safety during a downturn can be a profitable move as well. Given its strong financial health, the upswing that follows a downturn can allow you to profit from substantial capital gains.
Keep learning and happy investing!
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