UOL Group Limited: Strong growth but mainly due to revaluation gains

Strong earnings, but due to revaluation gains. UOL Group Limited
(UOL) reported a good set of 2Q07 results with revenue improving 24% YoY
to S$201.6. However, net profit growth for the quarter was much stronger,
rising over 421% YoY to S$286.3m. The much stronger bottom-line
performance was mainly due to revaluation surplus from the revaluation of
its investment properties. The total revaluation gain recognized was
S$274.4m. However, UOL did not provide the attributable value of this surplus
to the group, although we know that about S$5.5m came from Hotel Plaza
and assuming that 80% of the gain was attributed to UOL, the net bottomline
gain from revaluation surplus would be about S$215m. Excluding the
revaluation gains, UOL's PATMI would be about S$71.3m or growth of about
30% YoY. This is broadly in line with top-line growth. The key drivers of the
earnings improvement came from residential projects, dividend income and
to a lesser from its Hotel operation.
Development projects did well. In 2Q07, UOL recognized pre-sold
projects from Southbank, Newton Suite, Pavilion 11, The Regency and
Regency Suites. The good performance in this segment was reflected in
this division's revenue growth of 27% YoY to S$61.0m.
Hotel doing fine. UOL's hotel subsidiary, Hotel Plaza, had a more moderate
quarter, with revenue falling 1% YoY, but with PATMI rising over 100% YoY.
Revenue suffered mainly due to the sale of its Singapore Hotel Grand Plaza
while PATMI benefited from lower interest expenses as well as revaluation
surplus of about S$5.5m.
Hotel Negara redevelopment is now possible. Over the last 6 months,
UOL has bought two en-bloc redevelopment projects, i.e. Spottiswoode
Park (off Keppel Road) and a site at Tagore Avenue. The two freehold sites
cost UOL about S$335m collectively, and we estimate the breakeven at
S$980 psf and S$643 psf, respectively. Furthermore, with the recent high
transaction costs at Orchard Turn, we see the redevelopment of Hotel Negara
as back on track.
Maintain HOLD. Since our downgrade report dated 15 June, UOL peaked
at S$6.00 but has since corrected to the last traded price of S$5.25. Our
fair value stands at S$5.48, and as the upside is marginal, we see no
reason to upgrade our rating presently. We maintain our HOLD rating on
UOL.