GuocoLand (GUOL SP) - Maybank Kim Eng 2017-10-06: New Icon On Beach Road

GuocoLand (GUOL SP) - Maybank Kim Eng 2017-10-06: New Icon On Beach Road GUOCOLAND LIMITED F17.SI

GuocoLand (GUOL SP) - New Icon On Beach Road


Raising RNAV & Target Price; reiterate BUY 

  • We update our model for GuocoLand’s recent Beach Road win by assuming a mixed development with office, retail and residential components. With the office market on the cusp of a rebound, we believe that SGD11 psf rents are achievable by project completion.
  • Furthermore, with home prices already at a turning point, we expect its residential component to achieve a blended Average Selling Price (ASP) of SGD2,950 psf. 
  • We continue to see low risks of a cash call, as FY18E net gearing should remain comfortable at 1.0x. 
  • Maintain BUY. We raise TP to SGD2.90 from SGD2.75, based on a 20% discount to our revised RNAV of SGD3.64. 
  • Risks from a sharp fall in property prices and surprise policy tightening.


Building in Beach Road win 

  • We update our models to incorporate the Beach Road win. While details have not been announced, it is likely to build a 566k sf office building with ancillary retail space and 300 luxury apartments with average size of 800 sf. As such, we build our model accordingly. 
  • Our office valuation assumes that rents will recover to SGD11 psf and cap rates remain low at 3.5%. We believe that a blended ASP of SGD2,950 psf is achievable by the time the project is ready for launch. This is a reasonable assumption as Wallich Residences at Tanjong Pagar is already selling for SGD3,000 psf.


Low risk of fund-raising 

  • While the market is concerned that this deal could lead to equity fundraising by GuocoLand, our analysis suggests that its net gearing should remain comfortable and cash calls are unlikely. 
  • We lift our FY18E net gearing by 0.3ppt to 1.0x after incorporating the Beach Road project. 
  • We reiterate our view that establishing a REIT platform makes even more strategic sense now, as it would provide an avenue for capital recycling in new commercial developments like this one.


An even stronger Singapore proxy 

  • We believe the Beach Road deal has turned GuocoLand into an even stronger proxy for the Singapore market. 
  • Singapore now accounts for almost 70% of our valuation (from 60%). Singapore offices continue to underpin our valuation, at 43%. We believe GuocoLand can continue to ride on the improving residential sentiment if it includes a residential component for the Beach Road site.


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/ 2017-10-06
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.90 Up 2.750



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