Chip Eng Seng Corporation Ltd - Phillip Securities 2016-11-14: Development sales expected to pick up

Chip Eng Seng Corporation Ltd - Phillip Securities 2016-11-14: Development sales expected to pick up CHIP ENG SENG CORPORATION LTD C29.SI

Chip Eng Seng Corporation Ltd - Development sales expected to pick up

  • Chip Eng Seng Corporation’s (CES) 9M16 Revenue/PATMI met 83.4%/94.5% of our estimates and we have adjusted our forecast to reflect the better than expected performance.
  • Development sales in Fulcrum continues to be slow despite some price cuts.
  • Sales in Willow Apartments expected to accelerate after floor plan adjustment is completed.

Fulcrum is 41.4% sold; slowness in sales expected amid competition but expect further price cuts 

  • Sales volume in CES’ 128-unit freehold development project, Fulcrum, moved eight units (6.3% of total units) in 3Q16 at an average selling price (ASP) of S$1907 per square foot (PSF), down 2.4 percent compared to 2Q16. 
  • Our ASP estimate for Fulcrum remains unadjusted at $1,600 PSF and view that this is a realistic and conservative estimate. However, we have adjusted our estimated breakeven costs upwards to S$1,442 PSF to factor into the additional interest costs.
  • Our estimated ASP of S$1,600 will result in a potential development margin of 11%, translating to a 1.3 cents addition to our RNAV estimates. We are anticipating further price cuts at Fulcrum to accelerate sales as competition intensifies with more development projects being due for qualifying certificate (QC) fees in 2017. 
  • CES is not pressured to substantially cut prices for now considering that QC extension fees is only due in early 2018, which means the Group still have at >17 months to complete the sale of the remaining units in the development in order avoid QC fees.

Revision on Willow Apartments’ floor plans to accommodate buyer’s preference for larger units; Tower Melbourne litigation issue ongoing with appeal filed against development 

  • Management mentioned that they are currently revising the floor plans of the remaining unsold units in Willow Apartments ( < 50%) to accommodate homebuyers’ preference for larger sized units. As purchase price will increase following the introduction of larger floor plans, Management has reduced the initial down payment requirements to 5% of the purchase price. 
  • We are of the view that sales momentum is likely to pick up following the revision of floor plans. The handover of units is on track and slated to happen in 2H17. 
  • The litigation issue at Tower Melbourne involving the owner of an adjoining property is still ongoing, where the owner has filed an appeal against a new demolition plan of the current building which CES has already obtained a favourable determination. The Group is currently awaiting a hearing date for the appeal to be confirmed. 
  • While we acknowledge there is still adequate time for the development to be completed and handed over by the stipulated time before the exercise of the “sunset clause”, we will continue to exclude development profits (c.S$76.3 million or RNAV: c.S$0.12) from Tower Melbourne until there are more certainties. 

Investment Action

  • We acknowledge that there are near term headwinds for the Group’s Fulcrum development project, however, we believe that the Group will be able to move the remaining units at the healthy development margin. 
  • We have not factored in the potential development profits (S$0.12) from Melbourne Tower to our RNAV estimates due to the ongoing litigation issue until more certainties are in sight. 
  • We maintain an “Accumulate” rating on CES and an unchanged TP of S$0.72 based on our FY16 RNAV estimates.

Peter Ng Phillip Securities | 2016-11-14
Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 0.720 Same 0.720