Tuan Sing Holdings (TSH SP) - UOB Kay Hian 2017-11-29: Ride The Property Market With Prime Assets At Fire-sale Prices

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TUAN SING HOLDINGS LIMITED T24.SI

Tuan Sing Holdings (TSH SP) - Ride The Property Market With Prime Assets At Fire-sale Prices

• Reputable developer Tuan Sing Holdings (TSH) offers a unique opportunity to ride the property upcycle with an enviable S$2.3b property portfolio, which includes prime Singapore freehold properties and key Australia hotel assets, at fire-sale prices.
• We see RNAV expansion and yield pick-up with redevelopment of 18 Robinson completed and sale/monetization of non-core assets and property inventory unlocking value. 
• Initiate coverage at BUY and SOTP-based target price of S$0.71.

INVESTMENT HIGHLIGHTS

• Initiate coverage with a BUY and SOTP-based target price of S$0.71, offering 71.9% upside. We conservatively estimate our RNAV at S$1.07/share, with S$263.8m, S$1,613.9m and S$414.5m of development, investment and hotel properties respectively and zero value on two non-profitable subsidiaries. At current prices, property developer Tuan Sing Holdings (TSH) is trading at fire-sale levels of 61.2% discount to RNAV and 52% of book value.
• Reputable property developer with multiple awards on corporate governance, architecture and hospitality. Listed in 1973, TSH is reputable property developer who has won multiple awards on corporate governance and transparency (Top 1.1% on 2016 Singapore Governance & Transparency Index, Most Transparent Company Award for Mainboard Small Caps; SIAS 2016) as well as architecture and hospitality.
• Enviable S$2.3b property portfolio. TSH boasts a property portfolio worth about S$2.3b including Singapore properties in prime districts in Singapore such as Robinsons Road/Upper Bukit Timah. On top of that, TSH has a portfolio of prime freehold hospitality assets in Melbourne and Perth, Australia.
• Riding property upcycle at fire-sale prices. With en-bloc fever marking the beginning of Singapore’s property market upcycle and onset of a recovery in Grade A office rental as pipeline supply eases significantly, TSH is well positioned and offers investors an unique opportunity to ride the property upcycle at fire-sale prices.
• Completion of 18 Robinson redevelopment in 2H18 to see book value gain and yield pick-up; Sime Darby to offer redevelopment potential. In 2H18, redevelopment of 18 Robinson is expected to be completed. On top of revaluation gain, this could add a stable stream of S$19.8m in annual rental income which could result in a pick-up in current yield. Going forward, Sime Darby Centre offers further redevelopment potential as the area gears towards being a healthcare medical hub.
• Disposal of non-core assets and property inventory should unlock value in excess of S$149.5m. TSH owns a 44.5% stake in Gul Technologies (which focuses on in-demand rigid-flex PCBs, generating US$22.2m in net profit in 2016) and 80.2% stake in SGX-listed SP Corporation. Management has indicated their openness to a disposal of non-core assets which could unlock gains of up to S$116.7m. TSH could also see further S$32.8m gains from the sale of its property inventory.
• Fragrance CEO’s highest purchase price at S$0.455/share. Hotelier and property magnate Mr Koh Wee Meng, founder and CEO of Fragrance Group, purchased a total of 69,457,000 shares of TSH in the open market to bring his direct interest in the company to 5.905%. His highest purchase price of TSH was at S$0.455/share. Given Mr Koh’s respectable background in the hotel and property markets, investors should ascribe significant value to TSH at current levels.

VALUATION

Initiate coverage with a BUY and a SOTP-based target price of S$0.71. 

• With Singapore investment properties alone accounting for about 61% of our asset value, we believe TSH is an excellent proxy to ride the Singapore property upcycle. 
• We like TSH for its:
  1. attractive Singapore property portfolio,
  2. potential non-core asset disposal that could unlock value,
  3. steady yield with potential pick-up from the completion of 18 Robinson,
  4. potential redevelopment of Sime Darby Centre which will boost rental income, and
  5. recovery in Perth driven by a return to business spending after four years of stagnation.
• With the completion of the redevelopment of 18 Robinson in 2H18, TSH will have a property portfolio in excess of S$2.3b with the option to establish a commercial REIT platform which could immediately unlock S$1.4b of value while retaining decent recurring income thereafter. This would also provide a platform for recycling capital for future developments.

RNAV property portfolio value is conservative. 

• Our RNAV valuation of S$1.05b is conservative as we put majority of its property portfolio at book value and we apply a further 40% discount to all of its properties asset value. This is despite observations of recent transactions of nearby properties at higher prices ie Novotel Langley Perth was transacted at A$287,107/room key in Jan 17 while TSH’s Hyatt Regency Perth is merely valued at around $174,263/room key.

18 Robinson valued at S$2076psf vs $2500-2700psf for comparable. 

• For the upcoming 18 Robinson, we opt to account rental yields of comparative Grade A office buildings in CBD in arriving at our fair value though actual market value could be higher as evidenced by the recent transaction of Asia Square Tower 2 ($2689 psf) and stable average capital value of $2532psf for Grade A offices in Raffles Place/New Downtown (according to Collier’s International). This is compared to an implied $2076psf for TSH’s 18 Robinson (based on total planned gross floor area (GFA) of 259,260sf).

Further positive upside from property catalysts. 

• At the same time, we value Hypak and Pan West at zero and we did not take into account new factors that may individually or collectively be positive catalysts for the stock. Going forward, these include the asset enhancement initiative at Hyatt Centre Perth (Hyatt Regency Perth’s adjoining retail/office development), the proposed redevelopment of Sime Darby Centre as well as TSH’s proposed stake in a Batam development.

PEER COMPARISON

Small- and mid-cap developers to catch up with improved market sentiment surrounding tier-1 and tier-2 developers. 

• With the market quick to recognise the main beneficiaries of a property upswing among tier-1 and tier-2 real estate owners/ developers, we believe it is time to play catch-up for their small- and mid-cap peers who have built up a sizeable scale with a good track record to boot. 

Laggard play to catch up. 

• While the varied portfolio exposure to investment and development properties does not make for easy comparison, we view TSH’s valuation as undemanding. 
• Further dissecting TSH's peer group according to criteria such as ongoing development projects, investment property portfolios and geographical markets, we have identified Chip Eng Seng (CES) as a close peer. Without an overhang surrounding a cancelled development (CES' Tower Melbourne) coupled with next to no burden arising from unsold units as a result of QC and ABSD, we think a 40% discount is more than fair.
• We also note another attractiveness of TSH's portfolio over CES’ is its majority freehold/ 999-year leasehold tenure which will over the medium term stabilise the portfolio's NAV.

Gul Tech Peer Valuation 

• Gul Tech fair value at 12.2x 2017F PE. Global printed circuit board (PCB) peers are trading at an average of 15.3x 2017F PE. As a key player in the global PCB market, TSH’s subsidiary Gul Technologies (Gul Tech) boasts customers across diverse fields including automobile, computer peripherals, consumer electronics, telecommunications, healthcare and instrument & control. With strong growth opportunities in end-markets and Gul Tech’s focus on in-demand rigid-flex PCBs, a 20% discount to peers’ average of 15.3x 2017F PE is fair.
• We project share of results of Gul Tech to grow at 7.5% CAGR in 2016-19. Since PCB is integral to mobiles and smart devices, the rise in demand for smart devices will augment demand for PCBs. In addition, advanced technologies such as the Internet-OfThings (IoT) and wearables only point towards a long runway of growth. We project FY17’s share of results of Gul Tech to be S$16.0m.

Substantial value to be unlocked. 

• With a book value of about S$77.9m or S$0.18/share, based on 44.5% of 931.1m Gul Tech shares, any potential divestment of Gul Tech at current market comparisons will unlock substantial shareholder value. At 12.2x 2017F PE, we think valuations are not rich after taking into account the controlling stake any potential acquirer may seek.

BUSINESS OUTLOOK: Three Catalysts On The Horizon 

• Three catalysts: Two from redevelopment of investment properties, one from disposal of non-core assets. 
• We see three major catalysts for TSH with the first being the disposal of non-core assets and the other two coming from the redevelopment of key investment properties. Other than that, we expect a steady performance from its property development business and the rest of its S$2.0b hotel/investment property portfolio.

First catalyst: Disposal of non-core assets should unlock value and open doors for a special dividend. 

• TSH holds significant stakes in certain non-core assets. They have indicated on multiple occasions their intention to explore an exercise which may lead to the disposal of all non-core businesses and assets. We expect TSH stock to re-rate in response to any sale of non-core assets which would bring the stock closer to becoming a pure-play property counter. Sale of non-core assets could also see shareholders being rewarded with a special dividend which could see a bump-up in terms of dividend yield.
• Gul Tech focuses on in-demand rigid-flex PCB with a diversified clientele. We expect Gul Tech to be the first to be disposed of given the strong M&A interest in the Singapore technology sector. Gul Tech is a key player in the global PCB market. The company services customers in the automobile, consumer electronics, peripherals, telecommunications, healthcare and instrument & control markets through its plants in Suzhou, Wuxi and Jiangsu. It focuses on rigid-flex PCB which is much in demand.
• PCB valuations could fetch more than 12x trailing PE for Gul Tech, unlocking gains of S$116.7m. Gul Tech was previously listed on the Singapore Stock Exchange (SGX) and subsequently taken private in 2013. Gul Tech’s closest peer on SGX is Elec and Eltek which is trading at a trailing PE of about 12x. Should TSH dispose of its stake in Gul Tech, this could be done at valuations in the same range of about 12x trailing PE and unlock gains of up to S$116.7m. We estimate Gul Tech could generate in excess of US$25m p.a. in net profit as the company had recorded a net profit of US$22.2m in 2016.

Second catalyst: Completion of 18 Robinson redevelopment in 2H18. 

• In 2013, TSH commenced redevelopment of the previous Robinson Tower into 18 Robinson, a 28-storey high-ceiling, Grade A office space. Currently guiding a completion date of 2H18, the 999-year leasehold 1,725sqm site will comprise of an office tower with a retail podium of a total planned gross floor area (GFA) of 259,260sf and total lettable area of about 194,380sf. Completion of the redevelopment of 18 Robinson should provide a recurring income stream from the rental proceeds, which will contribute to more stable income streams for the group. Our channel checks on the construction site indicate smooth progress with 18 floors already completed and 10 floors remaining.
• Completion of 18 Robinson redevelopment should see book value expansion and yield pick-up. Upon completion of the redevelopment of 18 Robinson, we expect to see book value expansion of about S$141.3m, or S$0.12/share, as revaluation gains continue to be recorded in tandem with property completion. This does not include the developer profit of about 10% of property value that will be recorded upon completion. We forecast the redevelopment of 18 Robinson to contribute about S$19.8m p.a. in rental income to the group, implying a rental rate of S$10psf. Our channel checks indicate that pre-marketing has begun and we expect an 80-90% occupancy rate upon completion in 2H18.
• We have factored in long-term recurring income from the rental proceeds of 18 Robinson starting 2019, where investors should see yield double to about 2% p.a. Even if management decides to use the majority of rental proceeds to pay down existing borrowings, this would lead to a stronger balance sheet for the company.

Third catalyst: 96% occupied Sime Darby Centre with repositioning potential. 

• TSH announced the acquisition of Sime Darby Centre in Apr 17 for a total consideration of S$365m from US-based private equity giant Blackstone Group. The property sits on a part freehold and part 999-year leasehold commercial land of 140,886sf with an allowable gross plot ratio of 1.8 and a maximum permissible GFA of 253,595sf. Sime Darby Centre is about 96% occupied over a net lettable area of 202,712sf. TSH has indicated the intention to reposition Sime Darby Centre as a hub of activities as there is significant potential for commercial activities that can serve the needs of the vast residential community in the vicinity.
• Healthcare and medical redevelopment for Sime Darby. In the Urban Redevelopment Authority (URA) Master Plan for 2014, the area near Sime Darby Centre has been designated for use for health and medical purposes. This could have positive implications for Sime Darby Centre as the vicinity could be transformed into a medical hub similar to Novena. Should any redevelopment occur for Sime Darby Centre, it could be redeveloped to cater to healthcare needs.
• Robinson Point occupancy at 96% with stable rental. Other than 18 Robinson and Sime Darby Centre, the last key building of TSH’s Singapore portfolio is Robinson Point.
• In late-13, TSH acquired Robinson Point, a 21-storey freehold office building with about 134,320sf of net lettable area located at 39 Robinson Road, the heart of Singapore’s Central Business District. The average occupancy rate for Robinson Point in 2016 was 96% and average gross rental was S$8psf/month. Therefore, it is unlikely to be affected by the uncertain office rental market in the near future.
• 5-star Australian hospitality assets. TSH also owns two internationally-recognised 5- star hotels managed by Hyatt International, namely Grand Hyatt Melbourne and Hyatt Regency Perth together with their adjacent retail, commercial and parking components. In 2016, the hotels alone generated A$40.7m in net property income for the group.
• Visitors to Grand Hyatt Melbourne growing over the years. Grand Hyatt Melbourne (GHM) is located within Melbourne’s Central Business District at the “Paris End” on the southern side of Collins Street. The hotel opened its doors in 1986 and comprises a total of 550 guestrooms and suites over 34 levels. With Melbourne being Australia’s second most populous city and a major corporate centre for the financial, manufacturing and logistics industries, Grand Hyatt Melbourne has been experiencing growth in both domestic and international visitor numbers over the years.
• Asset enhancement initiative for Perth Hyatt Centre. Located at the eastern end of Perth’s CBD area, Hyatt Centre site spans 2.5 hectare and comprises the 367-room fivestar Hyatt Regency Hotel, the adjoining Hyatt Centre consisting of office, retail and car park facilities and the two vacant plots of land facing Terrace Road. TSH has proposed and received the planning approval from the City of Perth for the asset enhancement initiative in respect of Hyatt Centre and the development of Lot 11, one of the two vacant land plots, an initiative that will offer around 20,000 sqm of retail spaces by 2019.
• Perth poised for growth. In recent years in tandem with the commodities and mining sector slump, occupancy rates in Perth have been soft and average room rates have been on the decline. However, we believe after almost four years, Perth is poised to start growing again as businesses engaged in mining and resources are predicted to start investing once again as tech-metals surge in demand.
• Property development inventory worth in excess of S$260m. Other than investment properties, TSH is a major property developer in Singapore with a track record of excellence in developing some of the best-in-class private condominiums in Singapore.
• The group has two ongoing projects Kandis Residence and Jalan Remaja. TSH’s residential property inventory is worth an estimated S$263.8m in RNAV. We estimate TSH should see gains from sale of property development of S$32.8m should they sell their entire property inventory.

FINANCIAL OUTLOOK

Singapore investment and development properties to benefit from property upswing. 

• We forecast the property segment to contribute revenue of S$98.6m, S$96.7m and S$130.5m in FY17-19 as TSH launches Singapore development properties in 2017-18 and maiden rental contribution comes in from Sime Darby Centre and Raffles Tower in 2H17 and 2019 respectively.

Expecting uptick in RevPAR from Australian hospitality assets. 

• With Perth on the cusp of a recovery and Melbourne continuing to benefit from strong fundamentals, we forecast overall RevPAR growth of 3.0% and 3.4% in 2018 and 2019 respectively, while resigned to a lacklustre 2017 RevPAR decline of 4.9%. Hotel revenue is estimated at S$135.0m, S$136.9m and S$139.2m for FY17-19.

Overhang from industrial services cleared. 

• SP Corporation’s (SP Corp) tyre distribution unit has been posting weaker performances in recent years due to strong competition in key tyre distribution markets in ASEAN. This resulted in some overhang in the group’s overall performance. In the light of a challenging outlook, management has decided to discontinue its loss-making tyre distribution unit after the disposal of minor assets. 
• We view this development positively and expect the discontinuation to occur in early-18 which will see revenue coming down slightly. Revenue from industrial services is forecasted at S$130.1m, S$119.7m and S$121.1m in FY17-19 respectively.

EBITDA margins lifted by hotel and property segments. 

• Timely completion and strong sales from Kandis Residence and 1 Jelan Remaja should drive strong growth EBITDA growth in FY18-19. This will also be supported by strong fundamentals in Melbourne coupled with Perth’s resumption of growth even as Hyatt Centre, Perth proceeds with its asset enhancement initiative and Lot 11 undergoes development. 
• The discontinuation of SP Corp’s loss-making tyre distribution unit will remove any overhang over the bottom-line of the group while contributing positively to EBITDA. FY19 will also see 18 Robinson Development’s maiden EBITDA contribution. 
• We forecast group EBITDA to come in at S$47.2m, S$54.6m and S$78.5m in FY17-19 respectively and an associated uplift in EBITDA margins from 13.0% to 20.1% in the same period.

Strong earnings will strengthen balance sheet. 

• In spite of smaller gross development value arising from smaller plots of development land, TSH has managed to build up strong recurring cash flows through its property investments and hotel business. 
• We expect robust operating cash flow of S$58.4m, S$69.3m and S$79.2m in FY17-19 respectively which should sustain dividends of at least 0.6 Singapore cents. Net gearing is also expected to trend downwards to below 1.4x as TSH grows its cash pile.

COMPANY BACKGROUND: Enviable Property Portfolio Worth More Than S$2.3b 

Well-respected property developer and hotelier. 

• Founded in 1969, TSH was listed on the Mainboard of the Singapore Stock Exchange in 1973. 
• Over the years, TSH has evolved into a major player in property development, property investment and hotel ownership. The group is headquartered in Singapore with over 60 subsidiaries and associates located across ASEAN, China and Australia.
• TSH is majority owned by the Liem family (46.19%). In the early 1980s, the Liem family did a reverse takeover of a Singapore-listed company called Hytex. 18 Robinsons was subsequently injected into the listed vehicle and the company was renamed Tuan Sing Holdings in Sep 83.

Enviable property portfolio worth more than S$2.3b. 

• TSH has an enviable property portfolio in excess of S$2.3b with its Singapore and China development/investment properties worth S$1.7b and a S$641.8m hospitality portfolio in Australia. The assets come from both its property segment as well as its hotel Investment segment and are located in various prime districts in Singapore, Perth and Melbourne.

Non-core assets include listed Industrial Services entities and valuable tech manufacturer. 

• Other than its property and hotel portfolio, TSH also has an industrial services arm as well as other investments segment. 
• The industrial services segment consists of 80.2%-owned SGX-listed subsidiary SP Corp, primarily engaged in commodities trading and tyre distribution, as well as 97.9%-owned Hypak Sdn Bhd which manufactures polypropylene packaging bags and radiant barrier film in Malaysia. 
• The group holds a 44.5% interest in PCB maker Gul Tech and a 49% stake in Pan-West (Private) Limited, a retailer of golf-related products.

Multiple awards and accolades on corporate governance, property development and hospitality. 

• TSH places great emphasis on corporate governance and transparency, placing seventh out of 631 listed companies, or the top 1.1% on the Singapore Governance & Transparency Index, and winning multiple awards. 
• Its property development and design is also recognised with not only national-level BCA awards but also international awards like the 2016 Asia Pacific Property Awards: Architecture Multiple Residences or 2016 BCI Asia Awards: Top Ten 2016 Singapore Developers. 
• Its hotel investments have also received a wide variety of accolades including the 2016 World Travel Awards – Australia’s Leading Business Hotel 

RISK FACTORS

Geopolitical developments and external events affecting tourism and property development. 

• The hospitality and property development industries are extremely susceptible to external shocks such as terrorism, natural disasters, economic slowdown or even a disease outbreak. For instance, occupancy rates in Perth fell along with the commodity slowdown.

Foreign-currency fluctuations. 

• The group has operations in many parts of the world and is susceptible to the fluctuations of the domestic currency in each country.
• Translation exposure is mainly related to the Australian dollar, renminbi and the US dollar.
• According to the 2016 Annual Report, a 5% appreciation or depreciation in the three currencies against the Singapore dollar at 31 Dec 16 would have seen shareholders’ funds increase or decrease by about S$11.9m, S$5.6m, and S$6.1m respectively.

Interest rate risk. 

• Due to the high gearing of TSH, it is susceptible to movements in the interest rate. The group has the majority (> 90%) of borrowings pegged to a certain variable rate according to the 2016 Annual Report. 
• TSH has an S$900m MTN Programme under which it can issue notes in series or tranches and which may be denominated in Singapore dollars or other currencies as deemed appropriate.

Edison Chen UOB Kay Hian | Nicholas Leow UOB Kay Hian | Yeo Hai Wei UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-29

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