Chip Eng Seng - DBS Research 2017-11-06: Unwarranted Correction A Buying Opportunity

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CHIP ENG SENG CORPORATION LTD C29.SI

Chip Eng Seng - Unwarranted Correction A Buying Opportunity

• Chip Eng Seng's 3Q17 net earnings of S$14m supported by progressive recognition of development sales and one-off gains.
• Reveals plans to launch recently acquired Woodleigh and Changi sites in 2H18 and 1H19, respectively.
• Cancellation of Tower Melbourne sales contracts unlikely to impact earnings and tangible asset value. 

Maintain BUY with SOTP-based TP of S$1.18.

• Integrated real estate developer with strong capability to leverage on upcoming property upturn. Singapore-based Chip Eng Seng Corporation (CES) has been selectively acquiring projects in Singapore and overseas, which are ripe for the picking. 
• Most of the group’s residential projects already substantially sold and together with a construction net order book of S$458.4m (as at end-3Q17), CES has locked in at least S$1 bn in sales – which will be recognised progressively, underpinning strong earnings visibility in the coming years.
• Meanwhile, plans to launch recently acquired residential sites at Woodleigh and Changi in 2H18 and 1H19, respectively should boost the group’s earnings and NAV in the medium term.

Where we differ: 

• A largely uncovered stock, we like CES for its strong earnings visibility and the potential to unlock its undervalued hotel portfolio.

Potential catalysts: Successful pre-sales, landbanking activities 

• Potential unlocking of undervalued hotel portfolio. The group has also built up a sizable hotel and commercial portfolio. The jewel is Park Hotel Alexandra, which is recorded in its books at an estimated S$210m (S$475k/key) but potential realisable value, if sold, could be as high as S$376m (S$850k/key), which means a further 27Scts upside to current NAV. 
• While the hotel provides stable recurring cash flows to the group, substantial value could be unlocked given the robust demand for hotel assets in Singapore.

Valuation

Maintain BUY and SOTP-based TP of S$1.18. 

• Assuming a conservative 45% discount (vs larger peers’ 10%) to RNAV of S$1.88 and valuing its construction business at peers’ average of 8x FY18F PE, we arrive at a SOTP-based TP of S$1.18. 
• A prospective 4.2% yield is also on offer.

Key Risks to Our View

1. Execution risk,
2. Weaker demand,
3. Competition,
4. Equity fund raising risk.

WHAT’S NEW

Reports 3Q17 earnings and PATMI of S$18.7m (+106% y-o-y) and S$14m (+54% y-o-y), respectively. Results largely in line. 

• Helped by a divestment gain from 420 St Kilda, Chip Eng Seng’s 3Q17 earnings nearly tripled q-o-q to S$18.7m (+106% y-o-y) while PATMI came it at S$14m.
• Excluding the one-off provision of S$4.5m for foreseeable losses pertaining to a construction project, we estimate that quarterly earnings and PATMI would have otherwise been 24%/32% higher at c.S$23.2m/S$18.5m, respectively.
• Revenue in 3Q17 was mainly contributed by the Property Development segment as the group made progressive recognition of ongoing development projects - High Park Residences and Grandeur Park Residences (82.1% sold), and booked in remaining proceeds from the phased handover of completed townhouses in Australia (which should continue into 1Q18).
• Meanwhile, the pick-up in sales for Fulcrum (99.2% sold) and higher contributions from Hotels (revenue +45.7% q-o-q to S$10.4m) helped offset weakness in Construction (revenue - 17% q-o-q to S$50.4m).
• Temporary weakness in property investment portfolio given recent divestment. Contributions from its property investment portfolio declined 12.8% q-o-q following the divestment of the office building at 420 St Kilda Road in Melbourne (at a S$13m gain) during the quarter, but should recover in subsequent quarters with the proposed joint acquisition of a Grade A office building at 205 Queen Street, Auckland – which is expected to be completed by end-2017.
• Occupancies rising steadily across hotel assets. Park Hotel Alexandra saw improved occupancy rates in 3Q17 on the back of higher tourist arrivals into Singapore. Likewise, the newly opened resort in Maldives, Grand Park Kodhipparu, has also been seeing a steady ramp up in occupancies.
• Contributions from this segment is set to strengthen in 4Q17, especially with added contributions from the acquisition of The Sebel Mandurah which was completed in Nov 2017. The group is currently on the lookout for a fourth hotel asset.

Reveals launch plans for newly acquired Woodleigh and Changi sites. 

• We introduce FY19F forecast – with an expected 49% y-o-y sales growth to S$1.17 bn after CES revealed plans to launch its Woodleigh and Changi sites in 2H18 and 1H19, respectively. Contributions from these upcoming residential developments should boost the group’s earnings and NAV in the medium term.

Update on Tower Melbourne. 

• CES announced on 2 November that it will commence the termination of sale contracts for its Tower Melbourne (TM) project entered by its wholly-owned subsidiary in Australia, CESQ. This has been widely anticipated given that construction has been delayed indefinitely by ongoing legal proceedings since 2013 and as the sunset date for underlying sales contracts is set to kick in from 2018 onwards. The termination process for the 556 outstanding contracts would entail the return of the initial deposit (10% of purchase price) together with the interest accrued on the deposit. The necessary funds have already been set aside and managed under a trust. 
• CES also disclosed that they will be exploring other viable exit options for the TM site concurrently, including offering the property for sale.

Our take – share price correction unwarranted. 

• While legal proceedings are still ongoing, we firmly believe that the risk of impairment to the TM site’s book value is low at this juncture given that median prices for residential projects in the vicinity have risen c.50% since the project’s launch in 2012 and may even be positive for the group in the longer term if they are successful in
  1. disposing the property at current market value, or
  2. if CES chooses to relaunch the site at a later date.

Maintain BUY; TP of S$1.18. 

• Given fewer ongoing projects for the remainder of FY17F, we lower our projections for the Construction business slightly, but this is mostly offset by higher contributions from its Hotels business.
• Our RNAV assumptions and SOTP-based TP remained unchanged at S$1.88 and S$1.18, respectively. Maintain BUY.

Carmen TAY DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-11-06

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.180 Same 1.180