Perennial Real Estate Holdings - DBS Research 2017-02-09: Diamond in the rough

Perennial Real Estate Holdings - DBS Vickers 2017-02-09: Diamond in the rough PERENNIAL REAL ESTATE HLDGSLTD 40S.SI

Perennial Real Estate Holdings - Diamond in the rough

  • FY16 net profit supported by fair value gains.
  • Chengdu Healthcare Hub to open by 3Q17.
  • Beijing Tongzhou is the next major project.
  • Exploring healthcare fund opportunities.



Trades at 0.5x P/B; Maintain BUY. 

  • We maintain our BUY rating on Perennial Real Estate Holdings (PREH) but lower our TP to S$1.05 (based on 50% discount to RNAV). 
  • The stock currently trades at 0.5x P/B, which in our view has priced in most of the uncertainties on its ambitious expansion plans, execution risks on its development projects, and realisation of its development value.


FY16 results supported by fair value gains; Chengdu Healthcare Hub to start by 3Q17. 

  • FY16 net profit fell 40% to S$35m. The drop in net profit was mainly due to lower net fair value gains of S$35m vs S$39m in FY15, and lower revenue. Excluding net fair value gains, FY16 net profit fell to S$0.3m. 
  • The key positive updates were : 
    1. most of its existing investment properties are showing improved operational statistics; 
    2. Chengdu Healthcare Hub to start by 3Q17; 
    3. expect to launch pre-sales of residential / office properties at Beijing Tongzhou Integrated Development in FY17, and 
    4. exploring opportunities to set up a healthcare fund.


Unlocking development value from strategically located landbank with partial exposure to healthcare. 

  • PREH’s hidden gems lie in its vast integrated projects in strategic locations across the main transportation hubs in China. 
  • Currently, PREH trades at 0.5x P/NAV, offering massive upside as it gradually realises its RNAV potential. 
  • Chengdu Healthcare Hub expected to come onstream by 3Q17, which will also mark the start of realising returns from a string of investments in China. 
  • Apart from property, PREH has built a portfolio of medical and healthcare services to leverage on rising healthcare demand in China and Singapore.

Valuation

  • Our TP of S$1.05 is based on a 50% discount to RNAV to factor in potential execution risks and long development/gestation period. 
  • Our estimates include a marginal contribution from its new healthcare venture.


Key Risks to Our View

  • Negative changes to property rules in China and exposure to RMB currency fluctuations as PREH owns a large landbank in China.
  • Further deterioration in operating cashflows coupled with high interest cost may impact interest cover.




Rachel TAN DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-02-09
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.05 Down 1.320





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