UOL Group Ltd: 2Q09 within expectations

Operating performance remained within expectations. UOL Group reported losses for 2Q09 due to fair value losses from its investment properties but operating performance remained within expectations. Revenue increased by 2.1% YoY and 8.6% QoQ to S$213.7m and the increase came from revenue recognition of its development projects - Duchess Residences, The Regency at Tiong Bahru and Breeze by the East. Rental revenue from investment properties increased by 16.5% YoY but was flat QoQ. Hotel operations remained weak, with revenue falling by 21.4% YoY and 3% QoQ to S$67.5m in the quarter. Uncertain economic outlook and the outbreak of H1N1 virus affected the travel industry which led to lower occupancy and average room rates in the quarter. Dividend income plunged 39.7% YoY but was due to lower payouts from investment and non-inclusion of dividend income from UIC which has now become an associated company of UOL.

Rising NTA was a pleasant surprise in midst of losses. Fair value losses of S$77m were recognized on UOL's investment properties in 2Q09 and this was compounded by the fair value losses recognized by associated companies - UIC and Marina Centre Holdings. As a result, PATMI plunged into the red in 2Q09 with a loss of S$20.1m. Excluding fair value losses, underlying PATMI would have increased by 28% YoY to S$90m. Despite the losses in 2Q09, UOL's NTA per share rose by 2.3% QoQ to S$4.88 as the increase in the market value of its available-for-sale financial assets (not recognized on income statement) more than offset the decline in its asset value.

Fair value raised to S$4.07; upgrade to BUY. Our RNAV estimate of UOL has now been raised to S$4.44 per share (previously S$4.11), driven by the increase in share prices of UOB, UIC and Pan Pacific Hotels. The market value of UOL's holdings in these entities had risen by 12.5% since our last report on 15th July. In line with our recent adjustment of valuation discount rates on property developers, we have now lowered the discount rate on our valuation of UOL's development profit and investment properties, from the previous 30% to 20%. As such, our fair value of UOL now stands at S$4.07 (previously S$3.56). Valuation remains attractive as UOL is currently trading at Price/NTA of 0.7x and Price/RNAV of 0.77x. With an upside potential of 18.9%, we are now upgrading UOL from HOLD to BUY.

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