Perennial Real Estate Holdings (PREH SP) - DBS Research 2017-08-10: Unlocking Value Of Refurbished Assets

PERENNIAL REAL ESTATE HLDGSLTD 40S.SI

Perennial Real Estate Holdings (PREH SP) - Unlocking Value Of Refurbished Assets

1H17 recorded net profit of S$56m vs S$9m, boosted by divestment gains (S$56m) and fair value gains (S$47m).
Potential enbloc sale of AXA Tower.
Oxley joins PREH consortium’s UE acquisition via purchase of 7% stake in UE.

Perennial Real Estate Holdings (PREH)’s 1H17 recorded strong results with net profit of S$56m vs S$9m in 1H16, boosted by S$56m divestment and remeasurement gains from the sale of its 20.2% stake in TripleOne Somerset, and S$47m fair value gains from the reclassification of Xi’an North High Speed railway Integrated Development Plot 4 to an investment property. Excluding the divestment and remeasurement gains, we estimate 1H17 recorded a net loss of c.S$28m.
1H17 revenue fell 29% y-o-y largely due to lower rental and management fees from TripleOne Somerset following the divestment, partially mitigated by one-off divestment fee from the sale of TripleOne Somerset.
Share of results from associate (excluding revaluation gains in 1Q16) fell 66% y-o-y to S$5.1m due to one-off adjustment from a lease restructuring with Shenyang Red Star Macalline Furniture Mall recorded in 1Q17, partially offset by some contributions from deconsolidated TripleOne Somerset.
2Q17 net profit of S$17m (2Q16 was S$0.6m) was boosted by the revaluation gains from the reclassification of plot 4 at Xi’an development to an investment property. Excluding revaluation gains, we estimate 2Q17 recorded a net loss of S$22m.
As at 2Q17, net debt-to-equity stood at 0.51x (vs 0.66x in 4Q16; flat q-o-q) with an average interest cost of 3.8% (vs 3.3% in 1Q17). The improvement is largely due to the debt deconsolidation of TripleOne Somerset.

To-date, strata sales for TripleOne Somerset inched up to S$22m at ASP of S$2,788psf (c.S$18m at ASP of ~S$2,700 psf as at 1Q17). PREH recently announced that it is considering a potential enbloc sale of AXA Tower at no less than S$1.65bn (ASP of S$2,150psf).

On 13 July 2017, PREH consortium acquired 33.5% of United Engineers at S$2.60 per share, triggering a mandatory offer. Since the announcement, we understand that Oxley had acquired a 7.11% stake for S$120.3m (~S$2.66 per share). However, Oxley said it will not be making a competing offer. It appears to be an ally riding on Mr Pua’s ability to turnaround older assets.

The Perennial International Health and Medical Hub has recorded a committed occupancy of ~62% (~60% as at 1Q17) with a new mini-anchor tenant, BGI, a genome sequencing company, responsible for establishing the first gene pool in China.
Perennial Specialist Centre is expected to commence operations in 4Q17 while Chengdu Xiehe Home is expected to commence operations in 2Q18, which was delayed due to a longer than expected approval process.

Construction works are progressing well. Beijing Tongzhou Phase 1 and 2 expected to complete by 2020 and 2019 while Plot 4 and 5 of Xi’an are expected to complete in 2018 and 2019 respectively.
Healthcare Segment Ming Yi Guan, TCM at the House of Tan Yeok Nee, Singapore, a partnership with Beijing Hospital of TCM has officially opened in Jun 2017.

The show suites for Chengdu St Stamford Plastic Surgery and Aesthethic Hospital, Perennial International Specialist Medical Centre at PIHMH were completed in June 2017. Both the hospital and medical centre are expected to open by 4Q17 along with AND Maternal and Child Health Centre, Chenghua.
Renshoutang (eldercare) is expected to open 2 new eldercare and retirement homes; 502-bed Zhenjiang Jurong Eldercare and Retirement Home and 300-bed Zhenjiang Yixian Eldercare and Retirement Home in 3Q17. Jiuzhoutong Xiehe is expected to commence operations by end-2017. Renshoutang currently operates 2.8k beds and has a committed pipeline of > 5.5k beds.

We maintain our BUY rating with TP of S$1.05 based on a 50% discount to RNAV. Our earnings estimates have yet to factor in the higher divestment and remeasurement gains recognised in 1H17.
We continue to expect near-term earnings to be driven by divestment / fair value gains, as Mr Pua has once again demonstrated his capabilities of turning around aging assets with the proposed enbloc of AXA Tower. Recurring earnings would likely remain muted in the near-term as PREH holds out during the gestation period of its current development projects.
We remain positive on its medium to long term development plans especially as its investments in China (and its healthcare hub) slowly come to fruition despite potential near-term financial risks. We believe the strength of its stakeholders (79% owned by its four key sponsors including Wilmar’s Mr Kuok, OSIM’s Mr Ron Sim and CEO Mr Pua and partners and key management team) play an integral role to execute and mitigate potential financial risks.

Rachel TAN DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-08-10

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