1H22 Results Analysis: Rebound and recovery
- 1H22 core PATMI grew 67% y-o-y led by property development and hospitality rebound, in line.
- Positives: (i) strong residential sales, (ii) hospitality rebounding and hopeful to reach pre-COVID levels by year-end, (iii) retail recovery ongoing, (iv) office redevelopment works will see NLA uplift.
- Datapoints to watch: (i) UK office saw lease forfeiture and exercise of break clause but expect to backfill soon, ii) higher average interest costs, though still manageable.
- Maintain BUY, TP S$ 8.40
1H22 core PATMI grew 67% led by property development and hospitality rebound, in line with our FY estimates.
- UOL Group reported 1H21 headline PATMI of S$371m vs S$91m in 1H21. Core PATMI (ex-fair value and other gains) grew 67% y-o-y to S$181m, in line with our FY estimates.
- Core earnings growth was mainly led by property development (EBITDA +42% y-o-y) with higher progressive recognition from projects previously sold and rebound in hospitality (EBITDA of S$28m vs -$3m in 1H21).
- Gearing remained low at 0.28x vs 0.26x in FY21. The increase was mainly to fund the acquisition of the Watten Estate site and redevelopment / AEI of various properties.
- Average borrowing cost increased to 2.12% vs 1.50% in FY21, due to the issuance of fixed rate notes at 2.33% in Aug21, rising interest rate environment and new loan drawdown to acquire Watten Estate site.
Key Operational Highlights:
(+) Residential developments: Sales remain resilient despite rising interest rates
- 1H22 residential sales grew 21% y-o-y to 263 units mainly from Watergardens at Canberra (75 units sold) and Avenue South Residence (137 units sold). AMO Residences launched in Jul22, made headlines when it was almost sold out (98% sold) on the first day of launch.
- Given the strong residential demand, all projects have achieved more than 90% sales takeup except 2 projects; Meyer House (80% sold) and The Sky Residences, One Bishopsgate Plaza (37% sold)
- Pipeline launches targeted in 2023 – Watten Estate and Pine Grove sites – have a total of c.720 units.
- Given the tight residential supply in Singapore, management believes demand could remain strong despite rising interest rates especially for projects that are well located with strong attributes.
(+/-) Investment property: Retail recovery; ongoing AEI / redevelopment of Singapore could see further NLA uplift; UK office saw occupancy decline but expect to backfill the vacancy soon.
- Overall office portfolio occupancy fell due to redevelopment / AEI of Singapore office buildings (Singapore Land Tower and Clifford Centre) and a lease forfeiture and a lease break at UK Office.
- Despite lower occupancy, Singapore office saw broad-based improvement and recorded positive reversions.
- The construction work at Odeon Towers commenced in 1Q2022 and expected to complete in 2 years while Singapore Land Tower AEI is expected complete in 2Q24.
- Singapore Land Tower is expected to have 9% uplift in NLA. The redevelopment of Clifford Centre is expected to commence in early 2023 and should see credible enhancement in NLA.
- UK office saw a lease forfeiture and a lease break and committed occupancy has declined to 80.2% vs 91.4% in Dec21. We understand that previous tenant is a co-working operator. Management has successfully backfilled some of the space but is in discussions to backfill majority of the vacancy. Management expect committed occupancy can return to 90% and 80% for 110 High Holborn and 120 Holborn Island.
- Retail portfolio saw recovery following the reopening post COVID-19 pandemic. Shopper Traffic is 75% of pre-COVID levels and tenant sales have improved.
- Retail occupancy has improved marginally +2.8ppt h-o-h to 95.7%. Retail rental reversions are +4.5%.
(+) Hospitality: strong rebound especially in 2Q22 and hopeful to reach pre-COVID levels by this year; refreshed Asia hotels are timely to capture this hospitality recovery; .
- 1H22 hospitality segment has recovered to c.40% of pre-COVID levels. Management is hopeful to achieve pre-COVID levels by this year if strong travel demand continues.
- Singapore and Australia saw strong rebound while China remains challenging.
- Management had previously taken steps to refurbish its hospitality assets (especially assets in Asia) during the pandemic and are ready to make a timely debut to capture this hospitality recovery.
- Management will subsequently review potential refurbishments of its hospitality assets in Australia and expect to see more AEI works in Australia now that the Asia assets has been refreshed.
Ms Jesline Goh, Chief Investment and Asset Officer has resigned with effect from 11 Sept 2022. UOL has appointed Mr Neo Soon Hup as Chief Operating Officer with effect from 1 Sept 2022. Mr Neo is currently the COO of Pan Pacific Hotels Group since Mar20. He was previously CFO of Pan Pacific Hotels Group in 2005 to 2018.
We maintain our BUY call on UOL, TP S$8.40. UOL currently trades at 0.6x P/NAV, close to -1 SD of historical range.