UOL

The bullish outcome of a recent land tender for a city-fringe site has reinforced Maybank KE's cautious view on developers, as intensifying competition could further erode margins.

According to the URA, a 3,848 sqm site at Perumal Road, located next to Farrer Park MRT, attracted 11 bidders with Low Keng Huat submitting the top bid of $174m or $1,001 psf ppr. This is 4.4% higher than the next best bid tabled by China Construction and 27% above the $787 psf ppr paid for the nearby Sturdee Residences plot in Mar '15. Notably, nine of the 11 bids were also above the Sturdee Residences land price.

The 99-year leasehold site can be developed into 200 private apartments with commercial space on the first floor and should be able to garner keen interest given its proximity to commercial amenities, including City Square mall and Mustafa Centre.

Based on the potential average selling price of $1,600 psf, Maybank KE estimates that the developer could be looking at a rather fine pretax margin of 11% for the project.

This is also in line with the trend of narrowing margins for residential sites sold last year, underpinning the broker's cautious stance on developers. Furthermore, the persistently slow home sales could raise development risks and lower return on capital for developers.

Nevertheless, it is worth noting that recent hopes for potential sale of United Engineers and GLP could steer fund flows into the three large-cap developers, CapitaLand, City Dev, and UOL, as investors redeploy capital within the sector.

Under such climate, Maybank KE maintains its Neutral rating on the sector, and advocates exposure to stability over growth.

UOL remains as its top pick, with a Buy rating and TP of $7.39, as the developer may offer decent returns from its large recurring income base, and relatively better development earnings visibility from a conservative residential portfolio.

Downside of UOL is also largely supported by its compelling valuation, as it currently trades at a discount of 35% to RNAV.

With UOL touted to have greater potential upside among developers under Maybank KE coverage, investors may consider switching out of other developers into the counter.

- UOL: Buy, TP $7.39, potential upside 17%
- CapitaLand: Buy, TP $3.14, potential upside 10%
- City Dev: Hold, TP $8.90, potential upside 3%
- Ho Bee Land: Hold, TP $2.13, potential upside 3%
- Wing Tai: Hold, TP $1.67, potential upside 2%