Chip Eng Seng Corporation Ltd - Phillip Securities 2017-02-21: Strong take-up expected at new development

Chip Eng Seng Corporation Ltd - Phillip Securities 2017-02-21: Strong take-up expected at new development CHIP ENG SENG CORPORATION LTD C29.SI

Chip Eng Seng Corporation Ltd - Strong take-up expected at new development

  • Chip Eng Seng Corporation’s (CES) FY16 Revenue/PATMI exceeded our estimates and we have adjusted our forecast to reflect the better than expected performance.
  • Strong turnout at Grandeur Park Residences pre-launch event could indicate strong takeup rate at official launch slated in end-February.
  • Accelerated revenue recognition as handover of Williamson Estate is slated to happen earlier than expected.

Launch of new development project, Grandeur Park Residences, expected by Feb-17 which will potentially add 9.6 cents to our RNAV estimates when completely sold 

  • CES has pre-launched a 720-unit condominium development project, Grandeur Park Residences, last weekend on 18 February 2017. The development is located in the Tanah Merah district along New Upper Changi Road and approximately 200 metres away from the Tanah Merah MRT Station. 
  • We are expecting the take up rate for the development to be strong as majority of these units are smaller in sizes, translating to a lower purchase price which will aid homebuyers to secure financing in the face of the 60% total debt servicing ratio cooling measure. 
  • We expect ASP at the development to fall in the region of S$1,350. As the site does not require the prefabricated prefinished volumetric construction system and is able to generate cost savings by taking the construction works in-house, we are optimistic that the Group is able to lock in a development margin in the high teens. 
  • We project the development will potentially add c.S$135m in development profits and add c.18 cents (after taxes) in our projected RNAV when completely sold. 
  • We have not included potential contributions from Grandeur Park Residences in our current RNAV estimates.

Sales in Fulcrum muted in 4Q16 and expected to remain slow; Minimal price cuts expected as potential QC extension charges reasonably insignificant 

  • Sales volume in the Group’s 128-unit freehold development project, Fulcrum, was muted and the development has 56.2% unsold units in 4Q16. While competition intensifies with more development projects are due for qualifying certificate (QC) fees in CY17, we are expecting minimal price cuts for Fulcrum. This is because CES is not pressured to cut prices considering that QC extension fees is only due in early 2018, meaning that the developer still has some time to complete the sale of the remaining units in the development in order to avoid QC fees.
  • However, in an unlikely scenario that CES does not sell any more units in the next 15 months, we view that the impact from incurring potential QC extension charges works out to be S$3 million, translating to S$35 PSF, which is insignificant when compared to the current average selling prices of S$1,944 PSF in the development in CY16. 
  • Nonetheless, we remain confident that development margins on the sale of the remaining units in fulcrum will stay healthy on an average of 15%, and potentially add 2.5 cents to our RNAV estimates.

Investment Action

  • We remain optimistic on CES’ property development operations as the Group continues to deliver. 
  • The Group is currently reaping the fruits of labour from previously launched developments that are already mostly sold. We are awaiting for the impending launch of Grandeur Park Residences which we view is likely to garner strong traction in tandem with a strong turnout in the pre-launch event of the development. 
  • We maintain an “Accumulate” rating on CES with an upgraded TP of S$0.81 based on our FY17 RNAV estimates.

Earlier handover expected of units in fully sold development, Williamson Estate, in Australia; Sales in adjacent development encouraging and within expectations 

  • We are expecting CES to hand over units in fully sold development, Williamson Estate, earlier than expected in FY17 as construction of the project is already in its advance stages. We have adjusted our projections to take into account of the earlier handover of the units. 
  • Upon handing over, we estimate the Group to recognise c.A$28.9m in development profits which translates to 4.2 cents to our RNAV estimates (after taxes). 
  • While there is a slowdown in sales momentum in the Melbourne real estate market, we view that sales performance at the adjacent development, Willow Apartments, has been encouraging as the development is 56.3% sold as at 4Q16. We expect development margins to hover at the 15% mark despite the general slowdown which remains within our expectations.

Margins from Construction Segment is better than expected due to contributions from precast concrete contract; Order book able to provide revenue visibility till 2021 

  • Although the Group’s construction order book has slipped 14.5% quarter-on-quarter to S$537.4m in 4Q16, we note that the segment’s operating margin of 6.6% is above our expectations of a normalised margin of 5%. This is likely due to contributions from the contract involving the supply of precast concrete items which was awarded in August 2016. 
  • The current order book is able to provide revenue visibility till FY21. We are upbeat that the Group’s longstanding track record and solid execution in constructing HDB flats will continue to benefit the Group in winning more contracts moving forward.

Peter Ng Phillip Securities | http://www.poems.com.sg/ 2017-02-21
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