GuocoLand (GUOL SP) - Maybank Kim Eng 2017-10-06: New Icon On Beach Road

GUOCOLAND LIMITED F17.SI

GuocoLand (GUOL SP) - New Icon On Beach Road

We update our model for GuocoLand’s recent Beach Road win by assuming a mixed development with office, retail and residential components. With the office market on the cusp of a rebound, we believe that SGD11 psf rents are achievable by project completion.
Furthermore, with home prices already at a turning point, we expect its residential component to achieve a blended Average Selling Price (ASP) of SGD2,950 psf.

We continue to see low risks of a cash call, as FY18E net gearing should remain comfortable at 1.0x.
Maintain BUY. We raise TP to SGD2.90 from SGD2.75, based on a 20% discount to our revised RNAV of SGD3.64.
Risks from a sharp fall in property prices and surprise policy tightening.

We update our models to incorporate the Beach Road win. While details have not been announced, it is likely to build a 566k sf office building with ancillary retail space and 300 luxury apartments with average size of 800 sf. As such, we build our model accordingly.
Our office valuation assumes that rents will recover to SGD11 psf and cap rates remain low at 3.5%. We believe that a blended ASP of SGD2,950 psf is achievable by the time the project is ready for launch. This is a reasonable assumption as Wallich Residences at Tanjong Pagar is already selling for SGD3,000 psf.

While the market is concerned that this deal could lead to equity fundraising by GuocoLand, our analysis suggests that its net gearing should remain comfortable and cash calls are unlikely.
We lift our FY18E net gearing by 0.3ppt to 1.0x after incorporating the Beach Road project.
We reiterate our view that establishing a REIT platform makes even more strategic sense now, as it would provide an avenue for capital recycling in new commercial developments like this one.

We believe the Beach Road deal has turned GuocoLand into an even stronger proxy for the Singapore market.
Singapore now accounts for almost 70% of our valuation (from 60%). Singapore offices continue to underpin our valuation, at 43%. We believe GuocoLand can continue to ride on the improving residential sentiment if it includes a residential component for the Beach Road site.

Overpaying for land.
Poor execution of development project.
Sharp increase in interest rates, which could dampen demand for properties and drive down asset prices.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-10-06

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.90 Up 2.750