Frasers Centrepoint Ltd - DBS Research 2017-08-11: Strong 9M17 Figures

SGinvestors.io

FRASERS CENTREPOINT LIMITED TQ5.SI

Frasers Centrepoint Ltd - Strong 9M17 Figures

• Frasers Centrepoint Ltd (FCL)'s 9M17 net profit rose 17% y-o-y to S$441m, forming 82% of consensus estimates.
• Strong earnings contributed by completion of properties in China and Australia, and sale of properties.
• Sales volume hit close to 3,000 units.
• Seaside Residences sold > 440 units.

Growing developer with high dividend yield. 

• We maintain our BUY rating on Frasers Centrepoint Ltd (FCL) as valuations remain attractive at 0.8x P/NAV. The stock still lags the other large-cap developers, trading close to 1x P/NAV. 
• FCL's dividend yield remains the highest among developers at c.5%.

Where we differ: 

Poised to benefit from positive sentiment in Singapore property market; free float improvement a wild card. 

• The strong sales in Seaside Residences is a testament to positive sentiment in the property market. Given its diminishing land bank, we believe that any potential land-banking activities will be a positive catalyst. 
• Near-term earnings would likely be supported by completion of projects in Australia and China, while recurring income from new acquisitions such as Geneba, and new assets such as Frasers Tower, which is the only major building completing in the Central Business District (CBD) in 2018, should do well. 
• There is potential for recycling of assets from Waterway Point and Northpoint City. A potential improvement in free float would be a wild card.

Potential catalyst: 

Improved property sales, asset monetisation and improving free float and liquidity.

• Strong 9M17 results led by completion of projects in China and Australia, and sale of properties. 9M17 net profit rose 17% y-o-y to S$441m, ahead of street estimates. 
• Core net profit was up 62% to S$436m, driven by higher recognition from completion of development properties (+110% y-o-y) in China and Australia, and sale of two student accommodation assets. 
• Close to 3,000 units in property sales were recorded in 9M17 (9M16: 3,800). Meanwhile, Seaside Residences in Singapore sold > 440 units (52% take-up).

Valuation

• We maintain our BUY rating and raise our target price to S$2.35 on upward revision of FY17F-FY18F earnings, implying a 1x P/NAV.
  We have not incorporated newly acquired Geneba into our TP.

Key Risks to Our View

• Dependent on the outlook of the Australian real estate market and currency. The group derives an estimated 30% of PBIT from Australia, and returns could be impacted by the weakening AUD/SGD exchange rate.

WHAT’S NEW

Strong 9M17 results from completion of development properties and sale of properties. 

• FCL’s 9M17 net profit was up 17% y-o-y to S$441m, 82% of the street’s full-year consensus. Excluding fair value changes and exceptionals, net profit would have risen 62% to S$436m. 
• The strong growth was driven by higher recognition from completion of development properties (+110% y-o-y), largely contributed by the completion of Phase 3C1 of Baitang One in Suzhou, China (100% sold), Phase 3B of Gemdale Megacity in Songjiang, China (99.5%), completion of residential projects in Australia, and sale of properties including a bungalow at Holland Park recognised in 1Q17 and two student accommodation assets in Central Park, Australia. 
• In addition, FCL recorded its maiden contributions from its associate, TICON, which was acquired in January 2017. Share of associates increased 34% y-o-y and contributed 19% to the group’s earnings.
• 9M17 recurring income segment’s PBIT rose 6% y-o-y to S$502m, mainly from the hospitality segment from newly acquired Novotel Melbourne on Collins, Australia, and Maritim Hotel Dresden, Germany, and higher contributions from The Centrepoint, Singapore post completion of AEI.
• 3Q17 net profit rose 18% y-o-y to S$182m. Excluding fair value changes and exceptionals, net profit would have increased 168% y-o-y to S$182m. The strong growth was largely due to completion of development projects in China and Australia and the sale of two student accommodation assets in Central Park, Australia, as mentioned above.
• Despite the large recognition from the completion of development properties, the group’s 3Q17 EBIT margin fell marginally by 0.9ppts to 22%.

Segmental results: 

• Development profits driven by completion of China and Australia properties and sale of properties; recurring income grew 6% y-o-y.
• 9M17 core PBIT from development properties more than doubled to S$423m, led by the completion of Phase 3C1 of Baitang One in Suzhou, China which was recognised in 1Q17, completion of Phase 3B of Gemdale Megacity in Songjiang, China, completion of residential projects in Australia, and sale of two student accommodation assets in Central Park, Australia.
• Similarly, 3Q17 development properties' PBIT more than quadrupled to S$221m, largely from the completion of residential properties in Australia, phase 3B of Gemdale Megacity in Songjiang, China and residential properties in UK (Vauxhall Sky Gardens, Seven Riverside Quarter and Camberwell on the Green).
• 9M17’s PBIT for recurring income from investment properties (REITs and non-REITs) grew 6% y-o-y to S$502m mainly due to contributions from Frasers Hospitality Trust (+56%) with its newly acquired Novotel Melbourne on Collins, and Maritim Hotel Dresden in Australia and Germany, and higher recurring income from its Singapore portfolio (non-REIT +10% y-o-y) from higher contribution from The Centrepoint post AEI but partially offset by the absence of one-off fair value gain from Waterway Point recognised in 9M16. 
• 3Q17 PBIT increased by 12% y-o-y.

Net debt-to-equity stood at 0.7x. 

• Net debt-to-equity (including REITs) and cost of debt remained relatively stable q-o-q at 0.7x and 3.2% respectively.

Derek TAN DBS Vickers | Rachel TAN DBS Vickers | http://www.dbsvickers.com/ 2017-08-11

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.300 Same 2.300