United Overseas warns on profits
Recommendation
United Overseas Australia has warned that net profit for the year to December is likely to fall 18% to $88m, due to 'flatness of the Malaysian market following the parliamentary elections'.
We noted in our original upgrade that moves to limit the supply of luxury apartments may reduce United Overseas' margins, and the company is of course exposed to the Malaysian property market. We're in it for the long term, though, and with the company sitting on a healthy cash position, falling markets could bring new opportunities. And if the market were to fall further, we'd back management to allocate capital sensibly over time.
We also recently spotted a small transaction for an apartment within UOADEV (United Overseas' development business). The property was sold on an 8 per cent gross yield - translating into a purchase price of almost three times its book value. While immaterial in itself, we think it augers well for the portfolio-wide revaluation that will be undertaken at the end of year, and we're hopeful of a reasonable uplift.
As the amount of inventory that comes online ready for sale each year is unlikely to be consistent, profits are likely to be volatile when viewed from year to year. But with the stock continuing to trade well below net tangible assets, and on a reasonable dividend yield, our investment case remains unchanged. SPECULATIVE BUY.
Disclosure: The author owns shares in United Overseas Australia.