Frasers Centrepoint Ltd - DBS Research 2017-05-12: Poised For Growth and Expansion

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FRASERS CENTREPOINT LIMITED TQ5.SI

Frasers Centrepoint Ltd - Poised For Growth and Expansion

• 1H17 results in line, driven by completion of properties in China.
• Strong property sales seen in recent launches (Seaside Residences and Gemdale Megacity).
• Management is positive on Singapore residential.
• Management continues to look for landbank / development opportunities.

Growing developer with high dividend yields. 

• We maintain our BUY rating on Frasers Centrepoint Ltd (FCL) as valuations remain attractive at 0.8x P/NAV. The stock still lags the other large-cap developers, trading close to 1x P/NAV, implying that its upcoming Singapore projects have been broadly overlooked.
• FCL's dividend yield remains the highest among developers at c.5%.

Where we defer: 

Poised to benefit from positive sentiment in Singapore property with free float improvement a wild card. 

• The strong sales seen in Seaside Residences is a testament to positive sentiment in the property market. Given its diminishing landbank, we believe that any potential land-banking activities will be a positive catalyst. 
• Frasers Tower, which is the only major building completing in the Central Business District (CBD) in 2018, should do well in the midst of a drop-off in competitive supply that year. 
• In the retail space, Waterway Point and Northpoint City are potential assets for recycling as AEIs complete and operations ramp-up. A potential improvement in free float would be a wild card.

Potential catalyst: 

Improved property sales, asset monetisation and improving free float and liquidity.

• 1H17 results in line. 1H17 net profit grew 17% y-o-y to S$259m, 47% of the street’s full-year forecast. The strong growth was largely driven by higher recognition from the completion of properties in China. 
• Management is positive on Singapore residential following government’s relaxation measures but remains cautious on Australia residential.

1H17 results in line. 

• FCL’s 1H17 net profit grew 17% y-o-y to S$259m, making up 47% of the street’s full-year forecast.
• The strong growth was driven by higher recognition from sale of development properties, largely contributed by the completion of Phase 3C1 of Baitang One in Suzhou, China (100% sold), and North Park Residences (76% sold), and sale of a bungalow at Holland Park recognised in 1Q17.
• 2Q17 net profit fell 42% y-o-y to S$71m, mainly due to the absence of profits from Twin Fountains EC which obtained TOP in March 2016. This was partially mitigated by higher share of results of JV and associates (which tripled to S$15m) largely from contributions from Thai associates, TICON and Golden Land, and Waterway Point.
• The group’s 2Q17 EBIT margin fell marginally by 2.4ppts to 23% due to lower profit recognition from development properties.
• FCL declared a 2.4-Sct interim dividend (flat y-o-y) for 1H17.

Segmental results: Development profits driven by completion of China properties; recurring income grew 3% y-o-y.

• 1H17 core PBIT from development properties grew 34% y-o-y to S$202m led by the completion of Phase 3C1 of Baitang One in Suzhou, China which was recognised in 1Q17. However, 2Q17 development properties' PBIT fell 58% y-o-y, largely due to the absence of profits following the completion of Twin Fountains EC which was recorded in 2Q16, partially offset by higher completions in Australia (S$20m in 2Q17 vs a loss of S$14m in 2Q16).
• 1H17’s PBIT for recurring income from investment properties (REITs and non-REITs) increased marginally by 3% y-o-y to S$338m mainly due to contributions from Frasers Hospitality Trust (+38%) with its newly acquired Novotel Melbourne on Collins, and Maritim Hotel Dresden in Australia and Germany.
• 2Q17 PBIT increased by 11% y-o-y.

Net debt-to-equity stood at 0.7x. 

• Net debt-to-equity (including REITs) and cost of debt remained relatively stable qo-q at 0.7x and 3.1% respectively.

Management is positive on Singapore residential following government’s relaxation measures but cautious on Australia residential. 

• FCL recorded property sales of only 1,600 units in 1H17 vs 2,900 units in 1H16. This was largely impacted by lower property sales in China (-78% y-o-y) and Australia (-18%). Despite the lower sales volume in China, its recent launch (in February 2017) of Gemdale Megacity (Phase 4F) in Songjiang recorded strong sales of 81%. The project is expected to complete by 4Q18.
• In Singapore, FCL sold over 163 units of residential homes vs 100 units in 1H16. The strong sales recorded at Seaside Residences of 434 units (52% take-up rate) as at 8 May 2017 have yet to be included this quarter. At the results briefing, management expressed its optimism on the Singapore property market following the government’s relaxation measures. With the strong sales volume seen in the recent property launches, management believes this could be an indication of Singapore property market bottoming out.
• However, land supply remains limited and land bids are competitive, hence making it a challenge to replenish its land bank.
• Unrecognised development revenue stood at S$3.4bn (vs S$3.6bn in 1H16), mostly from Australia (S$2.5bn). Projects that are expected to be completed in 3Q17 include Watertown and RiverTrees Residences in Singapore (all >98% sold), while earlier phases of Gemdale Megacity in China are expected to complete by 4Q17 (close to 100% sold).
  • Singapore sales volume continued to pick up (1H17 +63% y-o-y), led by Parc Life (EC), North Park Residences and RiverTrees Residences. Strong sales at Seaside Residences will be recorded in 3Q17.
  • China achieved sales volume of 285 units (vs 1,300 units in 1H16). This was largely from the launch of Gemdale Megacity (Phase 4F), Songjiang in February 2017.
  • Australia’s 1H17 sales volume fell 18% y-o-y to 1,200 units from 1,500 units in 1H16. Property sales were mainly from projects in New South Wales and Victoria. Management targets to launch 2,500 units in FY17, of which 31% were released in 1H17. Unrecognised revenue stood at S$2.5bn as at 1H17, largely to be recognised in 2017/2018. Management is cautious on the outlook of residential properties in Australia as it is slowly seeing softer volumes following cooling measures implemented by the Australian government.

Commercial portfolio to deliver steady returns; AEIs on track. 

• In Singapore, the retail and office portfolio still achieved positive average rental reversions but marginally lower q-o-q of 5.1% and 3.7% (5.8% and 3.8% in 1Q17) respectively on slightly lower average occupancy rates of 91% and 88% (92% and 90%). Construction of Northpoint City and Frasers Tower are on track and expected to complete by end-2017 and 1H18 respectively.

Hospitality portfolio growth driven by new acquisitions.

• In 1H17, hospitality portfolio PBIT growth was largely led by maiden contributions from new acquisitions, Novotel Melbourne on Collins and Maritim Hotel Dresden, offset by weakness in GBP. 
• Despite the weaker demand impacted by bombings and political uncertainties in some countries, management continues to see strong growth in Australia and Japan. The scheduled openings of eight new properties this year are on track.

Active in acquisitions in Australia (land banking), Europe (M&A) and Thailand (M&A and land banking).

• The group remains active in investing into new development opportunities as seen in its few recent acquisitions/investments of land sites and M&A in Australia, Europe (Geneba) and Thailand (TICON, One Bangkok). 
• Given the development pipeline in Singapore in tapering off and management’s positive view on the Singapore property market, we expect the group to remain on a lookout for new land sites either in upcoming GLS or en bloc (though historically this may not have been the group’s main strategy).

Maintain BUY; raised TP to S$2.30 from S$2.00. 

• We maintain our BUY rating as valuations remain attractive at 0.8x P/NAV. The stock still lags the other large-cap developers, trading at an average of close to 1x P/NAV, despite the re-rating of its share price recently. 
• FCL's dividend yield remains the highest among developers at c.5%. 
• We raised our TP to S$2.30 from S$2.00 previously on a reduced discount to RNAV of 20% (previously 30%) following the positive sentiment on Singapore property market.

Key catalysts include 

1. improved property sales across its major markets following a potential recovery/continued positive sentiment on the property market, 
2. potential asset monetisation from ongoing strategies to crystallise value across its portfolio including Northpoint and Waterway Point, and 
3. improve free float and liquidity in the market with the potential restructuring of TCC Group, Thai Beverage and group of companies.

Rachel TAN DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-05-12

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.30 Up 2.000