Perennial Real Estate Holdings - CIMB Research 2016-08-07: Step by Step

PERENNIAL REAL ESTATE HLDGSLTD 40S.SI

Perennial Real Estate Holdings - Step by Step

2Q net profit of S$0.6m was below our expectations.
We think 3Q could be better with strata office contributions from 111 Somerset likely to kick in.
Chengdu projects to impact from 2017, preleasing commitments are progressing.
Healthcare operations likely to gather momentum.

PREH’s 2Q net profit of S$0.6m was way below our estimate.
Revenue dipped 39% yoy to S$24m (US$17.8m) on lower fee income and lower revenue from 111 Somerset as expiring leases were not renewed ahead of AEI and strata sales.
Net profit fell 93% to S$0.6m as interest expense expanded on increased borrowings, slightly higher average interest cost of 3.5% and absence of fair value gains.

Singapore accounted for 56% of revenue and 51% of EBIT. This division reported a 2% drop in EBIT due to lower occupancy as most retail tenants shifted out ahead of the asset enhancement initiative (AEI) to revamp the retail podium to include a luxurious food hall and food market.
Also, some of the office leases that expired were not renewed, being earmarked for strata sales. The pre-launch of the office strata sales began in Jun 16 with the launch in Aug. A few units were sold above S$2,600 psf.

Meanwhile at AXA Tower, progressive asset enhancements are underway and this exercise will be ramped up in phases as some of the area is being earmarked for offices and medical suites strata sales. About 64,050sf of space has been let/renewed at high single-digit rents and demand has been encouraging.

In China, committed occupancy at International Health and Medical Hub at the Chengdu East HSR rose to 56% with the sign up of a food court and seafood supermarket, ahead of its 2Q17 commencement date.
It has also earmarked 11,000 sq m of GFA for a new specialist medical centre. This should complement the ParkwayHealth Chengdu Hospital.
Furthermore, marketing activities for the nearby eldercare Chengdu Xiehe Home are scheduled to start in 4Q16 and commence operations in 2017.

Healthcare operations contributed a maiden $0.45m in 2Q, largely from the Aidegong and St Stamford Modern Hospital operations.
With the roll out of more value added treatment and services, we expect contributions from this segment to gain momentum over time.

We cut our FY16-18 EPS forecasts by 33-54% as we push out the pace of contributions from the Chengdu medical hub and absence of fee income. But we think 3Q earnings would be sequentially better with new office strata sales contribution.
We adjust our RNAV to S$1.86 to factor in additional 9.68m shares issued for the purchase of PRE P/L.
Our target price is accordingly adjusted to S$1.11, based on a 40% discount to RNAV.
Maintain Add.
Key risk is delay or slower than projected pace of China contributions.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2016-08-07

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.11 Down 1.140