HATTEN LAND (HATT SP) - Harbouring Blueprints For Malacca’s Skyline
- Hatten Land is one of Malacca’s leading property developers, specialising in integrated residential, hotel and commercial developments over the last 10 years. Dataran Pahlawan Malacca Megamall, Hatten Square Suites & Shoppes as well as Terminal Pahlawan are among its completed projects in Malacca.
- Currently, it is developing three mixed projects and one commercial property (7.8m sf by GFA).
- Initiate coverage with a BUY and SOTP target price of S$0.43.
Distinct earnings visibility on healthy pre-sales.
- Hatten Land’s current development portfolio (7.8m sf by GFA) comprises three integrated mixed-use development projects, (Hatten City Phase 1 & Phase 2 and Harbour City) and a commercial project (Vedro by the River). These projects, with the exception of Harbour City, are in advanced stages of completion and sales.
- Hatten City Phase 1 (comprising Elements Mall, SilverScape Residences and Hatten Suites) was fully completed in Mar 16 (70.7% sold), with Hatten City Phase 2 now 66% complete (53.5% sold) while Vedro by the River 65% complete (65% sold). Harbour City (9% completion) remains the sole project not in advanced stages of completion although it is now about 40% sold.
Having your cake and eating it too.
- On 10 Feb 17, Hatten Land entered into a nonbinding MOU covering five land plots from parent company (potential GFA of 9.2m sf) at value-accretive prices (RM30-80psf). The company subsequently entered into a conditional sale-and-purchase (SPA) agreement to acquire two of the five MOU land plots (potential GFA of nearly 5m sf).
- We have factored in the acquisitions of these five land plots on a complete basis in our SOTP valuation (see below).
Healthy land acquisition pipeline.
- Hatten Land also has the ROFR over 17 land plots which are not covered under the MOU or SPA agreements.
- We have not factored in these land plots in our valuation due to lower visibility on the injection timeline. However, these could contribute to valuation expansion should these land assets be injected at similarly accretive prices as the above agreements.
Established track record in Malacca.
- From its first development project (Dataran Pahlawan Malacca Megamall, now a leading mall in Malacca), Hatten Land has accumulated over 10 years of development activity, stemming from its roots as the property development arm of parent company Hatten Group.
Beneficiary of uplift in domestic hospitality.
- Hatten Land looks poised to tap into Malacca’s burgeoning tourism sector through investor demand for its serviced residences (Hatten Suites, SilverScape Residences, Imperio Residence and Harbour City Suites).
- This segment has witnessed growing visitor arrivals with tourism receipts reaching a new high in 2015. We also reckon that Malacca’s status as a UNESCO site (since 2008) will continue to be beneficial to the domestic residential market.
- Our target price is S$0.43, based on SOTP.
- There are two key components to our SOTP analysis:
- the RNAV from existing development projects with clear earnings visibility, and
- the potential value accretion from its pipeline of land acquisitions (covered under MOU/SPA agreements) from parent company Hatten Group.
- We have not factored in further accretion from Hatten Group’s remaining ROFR land pipeline, as they are not covered under the MOU/SPA agreements. This would imply further valuation expansion once Hatten Land sheds more light on injection details for these land plots.
- We impute a 30% discount to our RNAV for existing projects and a significantly higher discount of 80% for its MOU/SPA land. We have valued the MOU/SPA land on an “as if” complete basis, ie fully completed and sold, before discounting the attributable profits to the present.
- Bearing in mind that the pipeline land plots under the MOU/SPA agreements do not yet belong to Hatten Land, we see it fit to impute a markedly higher discount rate of 80%, given the substantial risk profile associated with the long gestation period (acquisition and completion of sales and development). We also note that one of the MOU land plots is still under land reclamation works.
- The table above highlights the sensitivity of our SOTP valuation to various discount rates for existing projects and the ROFR land. Our base case is 30% for existing projects and 80% for the ROFR land, which implies a fair value of S$0.43/share.
- Our sensitivity analysis indicates a worst-case scenario valuation of S$0.33/share should there be zero value attributable to the ROFR land, ie 100% ROFR discount, 30% discount to RNAV. However, we think this is rather unlikely as major shareholders have retained a 86% stake (according to Bloomberg) in Hatten Land. The company has also announced a MOU as well as SPA over five land plots held by parent company Hatten Group.
- Our fair value will expand to S$0.53/share once we lower the ROFR land value discount to 60% (RNAV discount still kept at 30%).
Key risks are:
- no assurance that the ROFR/call option for land acquisition will be exercised;
- bumiputera lot quota policy;
- rental obligations for units under sale and leaseback arrangements;
- sale of shares by vendors;
- potential currency translation risk;
- development risks;
- low trading liquidity; and
- local government policies.