Lian Beng Group - DBS Research 2017-12-05: Steering A Path Of Stability And Growth

Lian Beng Group - DBS Vickers 2017-12-05: Steering A Path Of Stability And Growth LIAN BENG GROUP LTD L03.SI

Lian Beng Group - Steering A Path Of Stability And Growth

  • Lian Beng Group - Steady proxy to a recovery in the property market.
  • Visibility from sizeable construction order book and sales pipeline.
  • Steady growth in recurring revenue streams on diversified investment portfolio, currently valued at over S$1bn.
  • Trading at 47% discount to RNAV; fair value of S$0.85 with possible upside from proposed spin-off and Gaobeidian.



THE BUSINESS


Diversified real estate play. 

  • Lian Beng is one of Singapore’s leading construction groups and through successful forays and diversification into the complementary Property Development and Investment segments, has gained substantial scale and scope over the last four decades.

Strong earnings visibility from a construction order book of c.S$836m; upcoming sales launches in 2018 to drive profitability.

  • After bagging nearly S$300m worth of contracts over a threemonth period, Lian Beng’s construction order book currently stands at c.S$836m, providing visibility into FY21F.
  • Equity interests in upcoming launches Rio Casa and Serangoon Ville, which has an estimated combined GDV of c.S$2.7bn (effective stake of 20%) and poised for launch in 2018, should boost the group’s earnings in the medium term.

Cash-generative investment portfolio valued at over S$1bn (and growing), offering stability. 

  • Lian Beng’s diversified and growing investment portfolio has spurred remarkable growth in recurring income at 105% CAGR over FY13-17, and is set to remain on a steady growth path as contributions from recent acquisitions kick in, further strengthening the group’s earnings profile.


THE STOCK


Fair value of S$0.85. 

  • Our RNAV is based on the valuations of Lian Beng’s investments and development properties. After imputing a 50% discount to RNAV and valuing its construction arm at peers’ average of 8x FY18F PE, we arrive at a SOTP-based fair value of S$0.85.
  • Further upside could come from the unlocking of shareholder value through the proposed spin-off of its property development business and attractive exposure to Gaobeidian (10% stake).
  • Key risks include uncertainty over sell-through rates for upcoming launches and margin pressures across key segments.


REVENUE DRIVERS 


Diversified real estate play. 

  • Established in 1973, Lian Beng continues to rank among Singapore’s leading construction groups and through successful ventures and diversification into property development and investments, has gained substantial scale and scope over the last four decades.
  • Construction typically forms the bulk of Lian Beng’s revenues, ranging between 56% and 95% over FY13-17, while Property Development sales tend to be lumpy – higher contributions in FY17 were mainly due to industrial properties Mandai Foodlink and Hexacube attaining TOP status. Contributions from Investment Holdings have also been on a steady uptrend.
  • Despite lower revenue shares, Investment Holdings and Property Development are key contributors from an earnings perspective – forming 47% and 25% of pre-tax profit in FY17. We attribute this mainly to Lian Beng’s strategic preference for JVs and associate stakes in residential development projects, which mitigates project risk.

Construction order book of c.$836m offers revenue visibility into FY21F. 

  • Lian Beng was recently awarded a c.S$137m contract for a private residential project at Potong Pasir Avenue 1, bringing its total construction order book to cS$836m (as at 28 November 2017), which will provide the group with a sustainable flow of construction activity through FY21F.
  • While Construction (including related businesses) revenues have fallen sharply over the last two years on the back of the industry slowdown, the progressive ramp-up on recent tender wins - particularly the high-profile S$435m contract awarded by HDB in March 2017, could take the Construction segment back into growth trajectory.
  • Assuming that at least 50% of its order book is recognised by FY19F, we project Construction revenues to grow c.60% to S$267.5m by FY19F.

Investment portfolio valued at over S$1bn; growing recurring income pool strengthens earnings profile. 

  • Through active management of its diversified investment portfolio – comprising c.S$850m of investment properties and S$165m in investment securities, contributions from Investment Holdings have grown at a remarkable 105% CAGR over FY13-17, representing 13% of group revenue in FY17.
  • Of which, Dormitories had the largest share (64% in FY17) – as 55%-owned Westlite Mandai and 49%-owned ASPRIWestlite Papan maintained high occupancies, while rental income on Investment Properties (33% share in FY17) tripled y-o-y following the acquisition of Khong Guan Industrial Building and four additional properties in October/November 2016. Interest and dividend income from Investment Securities made up the remaining 3%.
  • With these new acquisitions contributing to full-year FY18F, and possible rental reversions on selected commercial assets, Lian Beng’s recurring revenue pool is set to grow a further 21.6% to S$43.2m by FY19F.


GROWTH PROSPECTS 


Pick-up in sales for existing developments; upcoming sales launches to drive JV and associate contributions. 

  • While the majority of Lian Beng’s development properties have already been substantially sold, we believe the recent robust residential sales bode well for its Spottiswoode Suites and Floraville projects, which could see a pick-up in sales in subsequent quarters. 
  • Strong interest in the office sector also implies positive prospects for Hexacube. Sales for industrial development T-Space @ Tampines have also progressed well, and is 42.6% sold as at end-FY17 vs 19.9% a year ago.
  • Lian Beng holds a 20% equity interest in upcoming launches Rio Casa and Serangoon Ville. Poised for launch in April and June 2018 respectively, with an estimated combined GDV of c.S$2.7bn, they should boost the group’s earnings in the medium term.

Attractive exposure to Gaobeidian to bear fruit over the longer term. 

  • Lian Beng Group has a 10% stake in Sino-Singapore Health City, a development project with a planned land size of approximately 8,000 mu (or 5.3m sqm) and strategically located in Gaobeidian -c.40km away from China’s newly announced special economic zone, Xiongan New Area.
  • According to Oxley (which has a 27.5% effective stake in the project), residential prices in the vicinity have since tripled to c.Rmb12,000 psm and could even reach Rmb20,000 psm levels within the next two years. While this is generally positive for the group, it will likely take time for these prospective gains to materialise as property sales curbs imposed by Beijing creates an overhang.
  • Further growth could also come from new tender wins, acquisition of new investment properties (such as Wilkie Edge, which was completed in September 2017) and further diversification into complementary business verticals.


MANAGEMENT & STRATEGY 


Managed by founding Ong family. 

  • Lian Beng was founded by Mr Ong Sek Chong and currently helmed by his son, Mr Ong Pang Aik, who has been actively involved in the business since its early days and played an integral role in the transformation of the company from a family business into one of Singapore’s largest home-grown construction groups.
  • He is supported by several other members of the Ong family, who have also assumed key roles in the organisation, as well as industry veteran - including Mr Jeffrey Teo.

Strong dividend record. 

  • While Lian Beng does not have a fixed dividend policy, we observe that the company has paid at least 2 Scts p.a. since FY15, and rewarded shareholders with special dividends (1 Sct each in FY15 and FY16) when earnings were strong.
  • At current prices, a 2 Sct dividend represents a prospective 3.1% yield, which is decent.


VALUATIONS 


Fair value of S$0.85; possible upside from 10% stake in Gaobeidian 

  • Currently trading at a 15% discount to SOTP valuation and 0.6x P/NAV, we see Lian Beng as a diversified but steady (albeit smaller-cap) proxy to a recovery in the local property market.
  • Our RNAV of S$1.37 per share is based on the valuation of its existing investments (recently revalued in May 2017) and fair value for its development properties, with upside from its 10% stake in Gaobeidian - which we have yet to factor into our estimates - over the longer term.
  • After imputing a 50% discount to RNAV and valuing its construction business at peers’ average of 8x FY18F PE, we arrive at a SOTP-based fair value of S$0.85 for Lian Beng.
  • Assuming a 2-Sct dividend is maintained, a prospective 3.1% yield is also on offer.

Proposed spin-off of the Property Development business could unlock further value for shareholders. 

  • Based on our estimates, we believe that the Property Development business could be worth c.20-25% of the company’s RNAV on a standalone basis.
  • Given limited disclosures, we have not factored in any upside from this initiative. However, we opine that the listing of the Property Development business, if it materialises, could help create value for shareholders and facilitate independent access to capital markets.


KEY RISKS 


Tighter margins on higher land banking costs. 

  • Breakeven prices for recently awarded en-bloc tender sites at Rio Casa and Serangoon Ville are expected to be at a c.15% premium to prevailing property prices, which could further weigh on the already thinning margins faced by developers if recovery in the property market remains nascent.
  • Additionally, while the strategic preference for minority/associated stakes in residential projects helps mitigate the group’s exposure to project-specific risks, we acknowledge that in times of uncertainty or weakness, the benefits of diversification could be potentially offset by the lack of effective influence over these investments.

Risk of writedowns if rental rates do not improve. 

  • Through a 50:50 JV with Apricot Capital, Lian Beng acquired commercial property Wilkie Edge at a 39% premium above its valuation of S$201m in September 2017, and could be subject to writedowns if rental rates do not improve.

Competition in Construction sector remains keen.

  • Heightened competition in the local construction sphere could lead to more aggressive bidding among contractors and ultimately, compression of margins ahead.






Return *: 2
Risk: Moderate
Potential Target 12-mth* : 12-Month S$ 0.85




Derek TAN DBS Vickers | Carmen TAY DBS Vickers | http://www.dbsvickers.com/ 2017-12-05
DBS Vickers SGX Stock Analyst Report NOT RATED Explore NOT RATED 0.85 Same 0.85

*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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