UOA Development - OUTPERFORM

Stock Name: UOADEV
Company Name: UOA DEVELOPMENT BERHAD

Research House: KENANGA

Price Call: BUY

Target Price: 1.65

UOADevelopment (UOA) is proposing a dividend reinvestment scheme (DRS), which maybe applicable to FY11E NDPS of 10.0 sen (6.7% yield). Assuming 100% of FY11ENDPS is electable for the DRS, the dilution impact on  FY12E is  only  6%. Hence,  we  are not  worried  about dilutions given FY12-13E strong coreearnings growth of 39%-35%. We have raised our FY12-13E NDPS by 67%-33% to11.2-12.1 sen, respectively, as management is confident of providing similar,if not better, dividends to FY11E. Even with a 6% dilution, FY12-13E will stillprovide higher yields vs. FY11. We view the DRS positively as it will rewardshareholders, conserve internal cash and improve marketcapitalisation/liquidity. We  maintain  OUTPERFORM and  TP  of RM1.65  (based  on 52% discount* to FD SoP RNAV of RM3.46).We expect the group's products to buck the bearish property trend while theanticipation of its  continuous strongdividend payouts will lend strength to the stock. 

UOA has proposed a dividend reinvestment scheme(DRS), subject toshareholders approval  during theupcoming AGM (29/5/12). This will be the first developer to adopt such apolicy, to our knowledge. Another company which has adopted a similar policy isAxis REIT (OP; TP: RM2.82). Under the proposed DRS, UOA has the discretion toprovide shareholders an option to reinvest part or whole of the declared dividndsin new UOA shares. There is no official cap on the maximum number of new  shares arising  from  the DRS,  as  it is  only  subject to  the  quantum of dividends, issue price, electable portion and the number ofshareholders opting to reinvest their electable portions. The issue price howevermust be no more than a 10% discount to the 5-day VWAP prior to the price fixingdate. (See below). 

Proposed FY11E NDPS of 10.0 sen may be entitledto the DRS scheme.The company will be seeking shareholders' vote for concurrent approvals of theFY11E NDPS of 10.0 sen (6.7% yield) and the DRS scheme. Hence, FY11E NDPS couldbe entitled to the DRS.  We are notworried about dilutions as long as there is strong core earnings growth. We areconfident of our estimates and believe that the strong FY12-13E core earningsgrowth of 39%-35% will provide safety nets against significant dilutions.Assuming the entire FY11E NDPS of 10.0 sen (RM119.6m) is elected for the DRS,we expect the share base and market cap to grow by 7% each to 1.28b shares andRM1.91b respectively. Although the dilution impact on FY12E core EPS will thenbe 6% to 21.1sen, it will still show a 30% YoY increase. 

Dilutions on future dividends still implyattractive yields. However,we are revising up our FY12-13E NDPS by 67%-33% to 11.2-12.1 sen (7.5%-8.1%yield) on higher net payout estimates of 50%-40% vs. 30% previously, asmanagement is confident of providing similar, if not better dividends to FY11E.Assuming the 6% dilution impact as described above, FY12-13E net yields of7.0%-7.6% will still be higher than FY11E's 6.7%. Additionally, there is thepossibility of a special dividend, assuming any en bloc sales of Horizon officeblocks @ Bangsar South, which has yet to be imputed in our estimates. 

Positive on the proposed DRS. The rationale of the exercise is toreward shareholders as investors may be rewarded with cheaper entry points. Welaud UOA for the measure as it will help to improve liquidity and marketcapitalisation, while allowing the group to conserve cash and leverage on ahigher capital base for more landbanking opportunities. 

Source: Kenanga