(Stocks Discussion) SGX: UOL Group Limited (SGX: U14)?

UOL is the property business arm of Wee Chao Yaw's empire in Singapore. It has ties to UOB group. UOL owns a 50% stake in UIC, which I feel eventually UOL will be delisted by a takeover offer by UOL. This is due to their overlapping in business segments in the UOB empire, read my comments in UIC to get a better view.

UOL Is currently primarily a residential property developer where they bid for land in Singapore, build condos and then sell off to retail investors. It also runs the Pan Pacific Hotel Chain together with UIC in Singapore and recently started purchasing commercial and industrial properties (KM Mall and KH Kea Building) in its portfolio, a sign it is starting to overlap with UIC's property business segment

Business Profile

UOL Group (SGX: U14) is one of Asia’s largest property companies and through its subsidiaries engages in the real estate, retail and hospitality businesses. They operate in five segments: Hotel Operations, Property Investments, Property Development, Management Services and Investments.

SWOT

Strength: The company has a healthy capital position and diversified portfolio. They also have a strong brand presence in Singapore and was recognized for its architectural and design as it won awards in architecture and design. Based on the results, management also seems quite skilled.

Weakness: Despite positive earnings results, the company has actually very weak cash flows due to a lot of cash needed to be spent on development properties and the purchasing of other plants, property and equipment. Last year, the UOL consumed more cash than it could produce.

Opportunities: With control over a prime integrated development comprising a retail mall and 3 hotels fronting the Marina Bay area, UOL is positioned for asset enhancement/redevelopment riding on the government’s plan to rejuvenate the CBD.

Threats: Residential sales might be slower than projected or if its hotel operations are impacted by slower-than-projected performance. The upside risks to our view and target price would be higher-than-expected selling prices or upgrades to the target prices of its listed investment holdings.

Financials

Income Statement

Source: UOL Group Limited Annual Report FY18

Since 2014, revenue has been increasing steadily from $1.3bn to $2.4bn. This is quite an impressive growth rate. The highest revenue contributor is Property Development, almost representing half of their total revenue. Other significant revenue contributors include Property Investments and Hotel Operations. All segments experienced good growth over the years. However, the value of the properties does seem more spread out over the different segments.

Source: UOL Group Limited Annual Report FY18

Most of the revenue also originates from Singapore (80.3%), which does represent a high concentration risk. This means that any changes in the Singapore property market will have a significant impact on revenues as compared to a business diversified across regions.

Balance Sheet

The business does seem to carry strong short-term liquidity due to a relatively okay current ratio of 1.8. However, quick and cash ratio is relatively lower since it seems that a lot of their current assets are made up of inventory. Moreover, such inventories properties would have weak liquidity as well, since they are harder to sell and might even require lowering their prices to sell them.

The company seems to possess a relatively healthy debt profile, as evidenced by their default risk ratio metrics. This has been helped by relatively low debt held, but also because the business possesses relatively strong earnings to pay off such debt.

Operating profitability metrics look relatively weak, with low ROAs, ROIC and ROEs. Despite having high net profits, the business holds a lot of properties as assets, which is a unique characteristic of their business. What these metrics suggest is that a lot of cash is needed for reinvestment.

Cash Flows

Despite having strong earnings, the business looks like they have weak cash flows, where operating and investing cash flows are negative. This is because a lot of cash is held up in development properties ($1bn) and how the business is unable to delay their payables as much. Additionally, investing activities also require purchases in plant, property and equipment, which also consumes a lot of cash. In the end, free cash flow is actually negative.

Despite such weak cash flows, the company still paid out dividends worth $174mn. With a dividend payout ratio of 0.28 and strong earnings, this looks like a good dividend situation. However, this is quite a bad scenario since the business consumed more cash than it produced for the year.