Underlying profit up by 57% YoY. UOL Group reported a set of strong 1Q09 results that was aided by its acquisition of UIC shares. Revenue increased by 21.6% YoY to S$196.7m due to progressive recognition of revenue from development projects and higher rental income from investment properties. Contribution from hotel operations was weak, with revenue declining by 16.9% YoY to S$69.6m as occupancy rates and average room rates declined across most of its hotels. Finance expenses jumped significantly by 330.9% YoY to S$20.4m but this was largely due to a one-off facility fee of S$14.1m incurred for the offer for UIC shares. Contributions from associated companies were also higher with the inclusion of its share of UIC profits. A one-off negative goodwill of S$277.7m arising from the acquisition of UIC shares was recognized. As such, reported PATMI jumped 674.3% YoY to S$331.8m. Excluding one-offs, we estimate that the underlying PATMI would have increased by 57% YoY.

Reaping benefits from UIC acquisition. As UOL's stake in UIC now reached 31.6%, investments in UIC had been reclassified from available-for-sale assets to associated companies, which contributed to the 13% increase in NAV from end-FY08 level to S$4.82 per share. Profit contribution from UIC should also increase in the next quarter, when UIC will make its full quarterly contributions to UOL's bottomline. UOL's balance sheet remains healthy after the acquisition, with net gearing ratio increasing from 0.4x at end FY08 to 0.44x at the end of 1Q09.
Re-adjusting our forecasts. Hotel segment was the underperformer in 1Q09 and our outlook for the segment has been revised downwards as we expect conditions to remain challenging in light of the weak macro outlookand potential threat from the H1N1 virus. As such, our FY09 revenue estimate has been lowered by 5.6% to S$818.7m (previously S$867.2m). However, our FY09 PATMI estimate has now been raised by 105.8% to S$540.8m (previously S$262.8m), after accounting for the negative goodwill gain and contribution from UIC. Taking away one-off items, our FY09 underlying PATMI estimate has increased by 14.4% to S$300.5m (previously S$262.8m).

Downgrading to HOLD. Our RNAV estimate for UOL has now been raised to S$3.57 per share (previously S$3.25) and our fair value has also been raised to S$2.91 (previously S$2.58). In light of the recent increase in its share price, we are now seeing limited upside potential of 9.6% in UOL's share price. While we continue to like UOL for its diversified earnings and mass market exposure, we are now downgrading UOL from BUY to HOLD on valuation grounds.