Property Development & Inventory - CIMB Research 2016-03-18: Of privatisation and penalties

Property Development & Inventory - CIMB Research 2016-03-18: Of privatisation and penalties CITY DEVELOPMENTS LIMITED C09.SI  CAPITALAND LIMITED C31.SI  UOL GROUP LIMITED U14.SI 

Property Devt & Invt Of privatisation and penalties 

  • Low valuations and wide gap between equities and physical prices raises privatisation possibility. 
  • We think that QC penalties would not be a major M&A driver for our coverage universe. 
  • Instead, using the characteristics of previous M&A, we deem that United Engineers, GLP and Ho Bee have a higher likelihood of M&A. 
  • Current implied valuations show these penalty concerns are overdone and have not ascribed any of the Singapore residential businesses’ values into share prices. 
  • Maintain Overweight, top picks in the order of City Dev, UOL and Capitaland. 

■ Of privatization and penalties 

  • A slew of privatization newsflow, low public market valuations and impending QC penalties have led us to question whether there could be a flurry of M&A activity in the sector. 
  • Further, the wide disparity between equity values and transacted prices could spur asset monetisation. A prime example would be Saizen REIT, which sold its entire Japanese residential portfolio to Lone Star Real Estate Funds. 
  • In terms of valuation, the sector is trading at 0.68x P/BV and at a 42% discount to RNAV. 

■ Penalties unlikely to drive M&A 

  • Ultimately, we think that QC penalties would not be a major M&A driver for our coverage universe, given the large and diversified asset base of these companies. 
  • Also, we found that it would cost the owner much more to privatise the company, than to face QC (Qualifying Certificate) charges. 
  • We think companies that would be least impacted by the QC and ABSD (Additional Buyers’ Stamp Duty) charges would be Capitaland and UOL. 
  • Wing Tai and OUE could be most impacted from to its high end projects. 

■ Screening the potential M&A candidates 

  • Instead, using the characteristics of previous M&As, we deem that United Engineers (shareholder intent to sell), GLP (strong leadership in China logistics, underpinned by secular demand) and Ho Bee Land (cheap valuations coupled with a majority shareholder) have a higher likelihood of M&A. 
  • We deem that companies with a lower likelihood include Bukit Sembawang, Capitaland and City Dev. 

■ Property stocks have more than imputed potential penalties 

  • The negative implied valuations for developers’ Singapore residential businesses show that the market has more than compensated for the impending penalties and is not ascribing any value to this part of the business. 
  • While we think that private residential prices could slip by 5-8% this year, this looks fully factored into current share prices too. 

Maintain Overweight 

  • We maintain our Overweight rating for the sector and continue to advocate a stock picking strategy. 
  • We still prefer stocks with diversified business models and strong recurring income bases. 
  • Our top picks are City Dev, UOL and Capitaland.

Highlighted companies 

CapitaLand ADD, TP S$4.05, S$3.14 close 

  • We like CAPL for its ROE-boosting capital recycling activities. The stock trades at a steep 38% discount to RNAV 

City Developments ADD, TP S$10.32, S$7.58 close 

  • CIT’s valuations are attractive, at 0.76x P/BV and low net gearing of 0.28x. Potential nearterm catalyst could materialise when its overseas contributions ramp up, which would remove concerns over execution ability. 

UOL Group ADD, TP S$8.26, S$5.88 close 

  • UOL has high recurring income, underpinned by rentals, hotel and investment income. This provides a sturdy recurring income base. The stock now trades at 28% below our target price.

Peer Comparisons

LOCK Mun Yee CIMB Securities | Yeo Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-03-18
CIMB Securities SGX Stock Analyst Report BUY Maintain BUY 10.32 Same 10.32
BUY Maintain BUY 4.05 Same 4.05
BUY Maintain BUY 8.26 Same 8.26