Perennial Real Estate Holdings - DBS Research 2017-11-09: Investing For The Future

Perennial Real Estate Holdings - DBS Vickers 2017-11-09: Investing For The Future PERENNIAL REAL ESTATE HLDGSLTD 40S.SI

Perennial Real Estate Holdings - Investing For The Future

  • Perennial Real Estate Holdings (PREH)'s 9M17 results boosted by divestment/fair value/acquisition gains; 3Q17 recorded gains from bargain purchase of UE.
  • Strata sales for TripleOne Somerset rose 82% q-o-q.
  • Eldercare homes division expands footprint with two new facilities and acquisition of two new homes in Shanghai.
  • Increased its stake in Chinatown Point to above 50%.



Trading at 0.5x P/BV; maintain BUY. 

  • We maintain our BUY rating with TP of S$1.05 (based on 50% discount to RNAV) for Perennial Real Estate Holdings (PREH). The stock currently trades at 0.5x P/BV, offering a massive upside (TP at 50% discount to RNAV) as it gradually realises its RNAV potential.


Where we differ. 

  • Unlocking development value from strategically located land bank with partial exposure to healthcare. We are one of two brokers with coverage on PREH.
  • PREH’s hidden gems lie in its vast integrated projects in strategic locations across the main transportation hubs in China though these have lengthy gestation periods. Apart from property, PREH has built a portfolio of medical and healthcare services to leverage on rising healthcare demand in China and Singapore.


Potential catalysts: 

  • Strata/en-bloc sales, divestment of assets, building recurring income through healthcare hub and business.


9M17 results supported by divestment/fair value gains; expanding footprint of eldercare homes. 

  • PREH posted strong 9M17 results with a net profit of S$73m vs S$9m in 9M16, boosted by gains from bargain purchase of UE and gains recognised in 1H17. The key highlights from the results were:
    1. Strata sales for TripleOne Somerset increased by 82% q-o-q to S$39m;
    2. Renshoutang (eldercare homes division) opened two new facilities in Zhenjiang and acquired two new homes in Shanghai;
    3. increased stake to > 50% in Chinatown Point.


Valuation

  • Our TP of S$1.05 is based on a 50% discount to RNAV to factor in potential execution risks and long development/gestation period. 
  • We have assumed a marginal contribution from its new healthcare venture.


Key Risks to Our View

  • Negative changes to property rules in China and exposure to RMB currency fluctuations as PREH owns a large land bank in China. Further deterioration in operating cashflows, coupled with high interest cost, may impact interest cover.



WHAT’S NEW - Investing for the future 


3Q17 supported by gains from bargain purchase of UE; 9M17 boosted by divestment/fair value/acquisition gains.

  • Perennial Real Estate Holdings (PREH) recorded strong 9M17 results with net profit of S$73m vs S$9m in 9M16, boosted by share of gain on bargain purchase of United Engineers (UE) of S$19m (based on their effective stakes) and gains recognised in 1H17 –
    1. S$56m divestment and re-measurement gain from the sale of 20.2% stakes and
    2. S$46m fair value gain from the revaluation from the reclassification of Xi’an North High Speed railway Integrated Development Plot 4 to investment property. 
  • Excluding the divestment and re-measurement gains, we estimate that PREH would have recorded a 9M17 net loss of c.S$6.5m.
  • 9M17 revenue fell 34% 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 and higher revenue recorded by Perennial Qinyang Mall in Chengdu (Revenue from China +5.6% y-o-y).
  • Share of results from associate +85% y-o-y to S$35m largely from the S$26m gain on bargain purchase of UE offset by one-off adjustment from a lease restructuring with Shenyang Red Star Macalline Furniture Mall recorded in 1Q17.
  • 3Q17 recorded net profit of S$17m (vs 3Q16 S$0.4m), largely boosted by the gain on bargain purchase of UE.

Singapore and China remain its two largest markets.

  • Singapore contributed 53% and 91% in revenue and EBIT respectively, while China contributed 38% and 18% respectively in 3Q17.
  • As at 3Q17, net debt-to-equity stood at 0.59x (vs 0.66x in 4Q16) with an average interest cost of 3.7% (vs 3.3% in December 2016). The improvement in the ratio is largely due to the debt deconsolidation of TripleOne Somerset.


Updates on major projects:


TripleOne strata sales and AXA Tower proposed en bloc.

  • To date, strata sales for TripleOne Somerset has increased to S$39.4m at ASP of S$2,731 (as at 2Q17: strata sales of S$21.6m at ASP of S$2,788psf). Total strata sales to-date including AXA Tower is c.S$80m. The potential en-bloc sale of AXA Tower is ongoing.
  • However, we note that some existing tenants have taken up additional space for expansion. The upgrading and refurbishments of both TripleOne and AXA Tower are expected to complete by 2019.

Acquisition of 33.5% of United Engineers. 

  • Upon the closure of its general offer for UE on 19 September 2017, Yanlord/Perennial JV owns 33.5% of UE. As at September 2017, we understand that Oxley & related parties now own 15% of UE. Oxley maintains its stance to be a passive investor in UE.

Acquisition of additional 5.49% in Chinatown Point. 

  • On 3 November 2017, Perennial acquired an additional 5.49% interest in Chinatown Point, raising its effective interest to 50.64% from 45.15% while SPH acquired a 3.33% stake. Total consideration was S$8.5m at S$2,080 psf of NLA (similar pricing compared to its acquisition of Chinatown Point in December 2016).

Chengdu HSR Integrated Development. 

  • The Perennial International Health and Medical Hub has recorded a committed occupancy of ~65% (~62% as at 2Q17). One of the mini anchor tenants, Gu Lian Rehabilitation and Nursing Centre has completed fitting-out works while a number of retail and F&B tenants have taken over their units for renovation. Fitting out works for Chengdu Xiehe Home is ongoing and on track to open in 2Q18.
  • The development expects to commence operations progressively from 4Q17.

Beijing and Xi’an North HSR Integrated Development.

  • Construction works are progressing well. Beijing Tongzhou Phases 1 and 2 are 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; expanding its eldercare homes. 

  • As planned, Renshoutang opened two new facilities in Zhenjiang (502-bed Zhenjiang Jurong Eldercare and Retirement Home and 308-bed Zhenjiang Yixian Eldercare and Retirement Home), bringing the total number of operational beds to 3,600. 
  • In addition, Renshoutang acquired two new homes in Shanghai, namely;
    1. 850-bed home on Hongqiao Road at Changning for RMB813m (RMB22,000 psqm GFA) and expected to commence by 3Q18, and
    2. 2,500-bed home in Fengxian for RMB222mn (RMB2.3k psqm GFA) and expected to open by 2020.


Maintain BUY; TP S$1.05 

  • We raised our FY17F-FY19F earnings by 7-15% to incorporate the gains from bargain purchase of UE and some contributions from share of UE’s ongoing operations.
  • We continue to expect near-term earnings to be driven by divestment/fair value gains, as Mr Pua has once again demonstrated its capabilities of turning around ageing assets with the proposed en-bloc of AXA Tower. 
  • In the short-term, there will be additional earnings contributions from UE before potential AEI starts for some of the assets and we expect some contributions (albeit small) from the higher stakes in Chinatown Point in 4Q17.
  • We remain positive on its medium to long term development plans especially as its investments in China (and its healthcare hub) slowly comes 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) plays an integral role to execute and mitigate potential financial risks.




Rachel TAN DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-11-09
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.050 Same 1.050



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