Hong Fok Corp - DBS Research 2017-12-01: Prime Assets Going For A Song

Hong Fok Corp - DBS Vickers 2017-12-01: Prime Assets Going For A Song HONG FOK CORPORATION LTD H30.SI

Hong Fok Corp - Prime Assets Going For A Song

  • Hong Fok Corp - Integrated property developer and investor with quality portfolio of commercial assets in downtown Singapore.
  • Earnings catalyst from YOTEL launch and potential pickup in development sales.
  • Record bids at Beach Road commercial site imply significant upside to capital values for The Concourse.
  • Trading at c.62% discount to RNAV; fair value of S$1.31.



THE BUSINESS


Owner of prime commercial assets in Singapore. 

  • Hong Fok Corporation is an integrated property developer and investor with a sizeable investment portfolio valued at c.S$2.6bn (as at end-3Q17), serving as a steady source of recurring income of S$50.8m p.a. on average over the past three years. 
  • Close to 70% of the portfolio value is derived from three assets – YOTEL Singapore and International Building in Orchard Road and The Concourse (office block).

Upside to book values if portfolio is put to market. 

  • Given the limited scope for acquiring quality assets in Singapore, we believe that Hong Fok’s portfolio can fetch above-book bids if put to the market. 
  • The Concourse average holding cost of c.S$1,885psf on the books is more than 30% lower than the latest breakeven for The Beach Road commercial site by Guocoland (S$2,600 psf breakeven). 
  • In addition, prime properties in Orchard – International Building (S$1,855 psf) and YOTEL are valuable assets that in our view, will attract strong demand from international investors if an opportunity to acquire them comes along.

Doubling of EBITDA post YOTEL opening and potential pick-up in development sales. 

  • Mainly, the October 2017 launch of YOTEL Singapore Orchard Road is set to double rental income to sustainably higher levels of c.S$99m p.a. by FY19F. 
  • Unit sales for Hong Fok’s Concourse Skyline and Jewel of Balmoral could also improve given the robust residential backdrop.


THE STOCK

  • Trading at c.62% discount to RNAV and under 0.4x P/NAV. Our RNAV is based on the valuation of Hong Fok’s existing investment and development properties. After imputing a 40% discount to RNAV (vs 10% discount for large-cap developers) we arrive at a fair value of S$1.31.
  • Low liquidity and lucrative executive compensation at the expense of a higher dividend payout could hamper the stock’s ability to re-rate despite positive catalysts.


REVENUE DRIVERS 


Integrated property developer and investor in real estate.

  • Established in 1967, Hong Fok Corporation is principally focused on three business segments
    1. Property Investment, 
    2. Property Development and Construction of residential and commercial properties, and
    3. Property Management (provision of maintenance and management services).
  • Hong Fok derived a substantial proportion of its FY16 revenue from the leasing of its investment and development properties, which serves as a steady recurring income base for the group – generating an average of c.S$50.8m p.a. in rental income over FY14-FY16. Upside to group revenue comes primarily from development sales. However, unit sales have come off the FY13 peak, resulting in lower contribution to top line of c.12-17% (vs 77% in FY13).
  • Singapore remains the group’s predominant exposure, contributing c.95% of FY16 revenue, while Hong Kong accounted for the remaining c.5%.

Opening of Asia’s first YOTEL a key earnings driver. 

  • YOTEL Singapore Orchard Road - a 610-room hotel developed and constructed by Hong Fok and managed by cabin hotel group YOTEL was recently launched in October 2017.
  • Riding on the full-year contribution from YOTEL in FY18F and assumption of a modest rental reversion of +3% for The Concourse, rental income could more than double to sustainably higher levels of c.S$99m by FY19F.

Locking in sales from Concourse Skyline. 

  • Development sales have recovered slightly from a trough of S$7.4m in FY15 to S$9.3m (+26% y-o-y) in FY16. As at end-FY16, Hong Fok owned 118 units (GFA of 18,676 sqm) at Concourse Skyline and two units (GFA of 300 sqm) at Jewel of Balmoral. Assuming a 10% discount to the YTD average transacted price of S$1,729 psf for Concourse Skyline, this represents a substantial revenue opportunity of c.S$300m. 
  • We believe that the current property market upturn will enable the group to finally realise value from Concourse Skyline in the coming quarters.


KEY OPERATING ASSETS 


Investment property portfolio valued at c.S$2.6 bn; owns quality commercial assets in downtown Singapore. 

  • Hong Fok’s investment property portfolio is valued at c.S$2.6bn (as at end-3Q17), comprising Singapore and Hong Kong residential and commercial properties with a combined gross floor area of c.100,000 sqm – majority of which (95.3% of GFA) are prime commercial assets located in downtown Singapore.




GROWTH PROSPECTS 


Upside to capital values at Beach Road (Office tower @ The Concourse) post recent robust tenders in land sites.

  • Sentiment in the office sector is turning positive with rentals expected to rise 10-15% over 2018 on the cards. In addition, limited commercial sites have also resulted in robust bids by developers to gain a foothold in a rising market in the medium term. 
  • In September 2017, GuocoLand submitted the highest bid for the Beach Road commercial site at S$1,622m (42.5% above the reserve price of S$1,138m), which translates to S$1,706 psf based on gross floor area - the highest on record. Based on GFA and a development with 100% Premium Grade A office tower, we estimate the breakeven cost to range from S$2,242-2,372 psf. 
  • Meanwhile, Hong Fok’s wholly-owned investment property at The Concourse was valued at c.S$1.22bn on 31 December 2016 or an average holding cost of S$1,885 psf, which implies > 30% upside to current book value.

Headroom to acquire properties. 

  • With YOTEL just starting operations and poised to deliver strong cashflows from FY18F onwards, we believe that Hong Fok could be on the lookout for other suitable investment opportunities. 
  • Further, with low gearing of under 0.4x (on a gross basis as at end- 3Q17) vs peers’ c.1x, there remains room for the company to gear up and acquire, which could help catalyse earnings for the group.


MANAGEMENT & STRATEGY 


Managed by founding Cheong family. 

  • The company is currently helmed by several members of the Cheong family, whom we estimate hold a combined 52.7% stake in the company. 
  • Under the leadership of the highly experienced management team (with over 110 years of combined experience in the property development and construction field), Hong Fok has been successful in the execution of its development projects and stands out for its steady operating cash flows and low average holding costs of its investment properties, leading to further revaluation potential.

Low annual dividends, alignment of interest with minority shareholders can be further improved. 

  • Hong Fok initiated dividend payments from FY12, and has been paying a fixed 1-Sct dividend p.a. since FY14. 
  • Despite the Cheong family’s controlling stake and regular dividend payout, management’s interest does not appear to be adequately aligned with minority investors given elevated compensation levels (especially to the Cheong family) vs earnings and peers, which needs to be further addressed.



NOT RATED
Return *: 2
Risk: Moderate
Potential Target 12-mth* : 12-month S$ 1.31 (59% upside)



Derek TAN DBS Vickers | Carmen TAY DBS Vickers | http://www.dbsvickers.com/ 2017-12-01
DBS Vickers SGX Stock Analyst Report NOT RATED Maintain NOT RATED 1.31 Same 1.31

*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report.


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