GuocoLand (GUOL SP) - Maybank Kim Eng 2017-09-29: Top Bidder For Beach Road Site

GuocoLand (GUOL SP) - Maybank Kim Eng 2017-09-29: Top Bidder For Beach Road Site GUOCOLAND LIMITED F17.SI

GuocoLand (GUOL SP) - Top Bidder For Beach Road Site


Stronger case to establish a REIT platform; BUY 

  • GuocoLand and its parent Guoco Group (53 HK, Not Rated) submitted the top bid for the Beach Road commercial site. At SGD1,706 psf ppr, the bid is above consultants’ expectations and fairly aggressive, in our view.
  • Nonetheless, this project should still be profitable and we estimate a surplus of SGD0.06 for GuocoLand’s 70% stake in the project. While it could lift net gearing to 1.0x by FY18E, we see no need for equity fund raising. Having said that, this new project has strengthened our case for a REIT platform. 
  • We keep our estimates unchanged pending award of the tender. Maintain BUY and RNAV-based Target Price of SGD2.75. 
  • Risk is a sharp fall in property prices.


Top bidder for Beach Road commercial site 

  • GuocoLand will take a 70% stake in this development, while its parent Guoco Group will take the remaining 30% stake. Their bid price of SGD1,622m translates into a unit land cost of SGD1,706 psf ppr, which is the highest land price for a commercial site in over a decade. 
  • A total of five bids were submitted with the top bid at a narrow 3.2% premium over second placed Kingsford, a Chinese developer. (See details of the site and tender bids received published by URA.)


SGD2.4b GDV implies a development surplus of 6cts 

  • Our earlier analysis suggests that a developer can achieve a SGD2.4b GDV at this site. (See report: Singapore Property - Land Market Springs To Life dated 22-Sep-2017)
  • At GuocoLand’s bid price, we estimate a discounted development surplus of SGD0.06 for its stake. To recap, at least 70% of the site’s maximum 88,313 sqm GFA must be for office use, while the balance can be for hotels, serviced apartments, residential units or retail space. 
  • With an impending rebound in Singapore’s residential market and a less restrictive development timeline, we see good reasons to incorporate a residential component.


Gearing to inch up to 1.0x; Stronger case for a REIT 

  • While this new project could lift FY18E net gearing to 1.0x (from our current estimate of 0.7x), it remains comfortably below its historical average of 1.6x over FY11-15 and we see no need for equity fund raising.
  • Having said that, this new project has strengthened our case to establish a REIT platform, which could provide an avenue to recycle capital in new commercial developments like this one. (See initiation report: GuocoLand - Riding the Singapore Upcycles dated 16-Aug-2017 for details)


Swing Factors


Upside

  • Strong rebound in high-end home prices in Singapore.
  • Pick-up in office prices.
  • Monetisation of commercial assets with outright sale or spin-off into funds.

Downside

  • Overpaying for land.
  • Poor execution of development project.
  • Sharp increase in interest rates, which could dampen demand for properties and drive down asset prices.




Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-09-29
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.750 Same 2.750



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