Cogent Holdings Ltd - Phillip Securities 2016-07-27: Tenancy uncertainty lifted

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COGENT HOLDINGS LIMITED KJ9.SI 

Cogent Holdings Ltd - Tenancy uncertainty lifted

• Extension of master tenancy at The Grandstand.
• Continuation of a high margin business segment with improved outlook. 
• Downgrade to "Accumulate" rating on recent run-up in price.
• Recommend investors to buy on price weakness.

What is the news?

 Extension of master tenancy at The Grandstand

• Cogent Holdings Ltd (Cogent) has announced the extension of its master tenancy at 200 Turf Club Road, The Grandstand. The current tenancy will expire on 28 February 2018, and it has been extended for a further 2 years 10 months from 1 March 2018 to 31 December 2020.

How do we view this?

 Continuation of a high margin business

• The Grandstand was reported under the "Property management services" segment until FY13. EBIT margin for the segment was 32.6%, compared to the other business segments that ranged between c.9% and c.20% margin. 
• Cogent has subsequently reported The Grandstand under "Warehousing and property management services" and the segment achieved an EBIT margin of 32.7% in FY15. 
• While the results for The Grandstand is no longer reported on its own, we believe that it still commands a margin of up to 30% today.

 Positioning should be resilient against threat from e-commerce

• The Property has been positioned as a lifestyle destination, catering to children enrichment and food & beverage needs. We view these consumer segments as being less susceptible to the threat of e-commerce, as they are not purchased online.

 Improved outlook through better accessibility with the opening of DTL2

• The opening of Downtown Line 2 (DTL2) on 27 December 2015 has improved accessibility to The Grandstand. The Sixth Avenue station on DTL2 in now the closest MRT station and should facilitate visitor traffic to The Grandstand.

Downgrade to "Accumulate" rating with unchanged DDM target price of S$0.70

• The extension of the master lease has lifted any uncertainty of the continuation of this business segment for Cogent. We do not make any changes to our forecasts, as we had already assumed that the tenancy would be renewed. 
• Downgrading our rating to "Accumulate" on recent run-up in price. Recommend investors to buy on price weakness.

Richard Leow CFTe Phillip Securities | http://www.poems.com.sg/ 2016-05-16

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