Chip Eng Seng - Phillip Securities 2016-03-14: Challenges in operating environment to persist

Chip Eng Seng - Phillip Securities 2016-03-14: Challenges in operating environment to persist CHIP ENG SENG CORPORATION LTD C29.SI 

Chip Eng Seng Corporation Ltd - Challenges in operating environment to persist 

  • Encouraging performance at Alexandra Park Hotel despite headwinds in the hospitality sector. 
  • Challenging environment ahead for properties construction sector and excess supply of local unsold properties could continue lead to weak properties sales. 
  • A key catalyst to watch for is the unwinding of property cooling measures in Singapore which CES is likely to be a major beneficiary. 
  • Maintain accumulate but revised our target price down to $0.72 (previous S$1.04). 

What’s the news? 

 Buoyant sales of units in local development, High Park Residences and Williamson Estate in Australia. 

  • Both developments are almost completely sold as at Dec-15, booking in healthy development margins according to our projections. In addition, Land bank with marketing materials and planning permit in Melbourne is to be sold for double its purchase price back in 2013. 

 Legal held-ups at Tower Melbourne still ongoing. 

  • The Victorian Civil and Administrative Tribunal has struck out the cancellation application of the development’s planning permit in Mar-15. We will monitor closely and provide updates as they become available. 

 Reversed plans to spin off construction segment for the time being. 

  • Plans for the restructuring of its construction arm through a spin-off was called off in Feb-16, quoting challenging market conditions are among factors that prompted for the reversal. 

 Visibility of sustaining current dividends to 2020. 

  • Including only the progressive recognition of revenue and development profits from High Park Residences until its TOP (~$32m/year), translating to an EPS of $0.04 which matches the DPS of $0.04 (excluding special dividends) for the past 6 years. 

FY15 results summary 

  • FY15 earnings declined 77.6% to $63m mainly as a result of lower contribution from property development segment, as the bulk of revenue from previously launched projects has already been recognised in the previous year. 
  • The construction segment booked in 8.5% lower revenue of $305.8m due to lesser active projects in the year. 
  • New hotel segment contribution. The drop in revenue performance was partially offset by maiden contribution from the hospitality segment from Alexandra Park Hotel which began operations in May-15. 
  • Rental income from property investments were up 54.6% to $9.1m driven by rental contribution from CES Centre which was incepted in 1Q15. 

Investment Action 

  • Taking into account of the challenging operating environment in the key business segments which CES is principally engaged, namely construction, property development and the hospitality sectors, we have assigned a higher discount of 50% to our RNAV estimates. 
  • However, earnings from previously sold developments provide some degree of dividend sustainability (dividend yield of 5.7% based on a closing price of $0.69) for investors and any weakness in price presents opportunities for investors to accumulate. 
  • Along with a change of analyst, we maintain a rating of accumulate and have revised our target price down to $0.72 (previous S$1.04). 

Peter Ng Phillip Securities | 2016-03-14
Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 0.72 down 1.04