Bukit Sembawang (BS SP) - Maybank Kim Eng 2017-12-13: Proxy For “Home’’ Run

Bukit Sembawang (BS SP) - Maybank Kim Eng 2017-12-13: Proxy For “Home’’ Run BUKIT SEMBAWANG ESTATES LTD B61.SI

Bukit Sembawang (BS SP) - Proxy For “Home’’ Run


Cyclical upturn; initiate with BUY 

  • Bukit Sembawang (BS) is a concentrated proxy for Singapore’s residential market, which we believe is at an inflection point after four years of price falls. 
  • We expect a cyclical earnings rebound in FY19/20E, reversing its earnings contractions of the past six years. 
  • The stock is attractively priced at a 42% discount to RNAV, larger than the 14% trading discounts of its large-cap peers. This is despite its prospects of stronger returns. 
  • We believe its market-leading dividend yields of 5.6% can be sustained by a pristine balance sheet and improving earnings. 
  • Initiate coverage with a BUY and SGD8.25 TP, at a 20% discount to our RNAV of SGD10.31. 
  • Risks include poor execution of development projects and property price fall.



Concentrated proxy for strengthening resi market 

  • With stronger home-buying sentiment depleting unsold inventories in the market, we see scope for developers to raise home prices in 2018. 
  • And with 1.1m sf of properties under development, we believe Bukit Sembawang can immediately capitalise on improving market conditions. In particular, we believe a successful launch of 8 St Thomas is a potential catalyst to watch. 
  • Earnings could stage a cyclical rebound in FY19/20E on the back of stronger home sales.


Legacy land provides upside as land prices escalate 

  • Bukit Sembawang owns vast plots of legacy land which can yield an estimated 1.1m sf of saleable area, potentially providing a pipeline that could last for decades. These land parcels are increasingly valuable and appealing considering an environment of elevated land prices. 
  • While most developers are under pressure to bid aggressively to secure new development sites, we believe Bukit Sembawang is not compelled to do so. Although its land parcels could be worth almost SGD1b today on our estimates, the market appears to have priced them at zero value.


Attractively valued vs large-cap peers 

  • While poor corporate access, low stock liquidity and the long time needed to fully develop its legacy land are possible reasons to overlook this stock, we believe its attractive valuations more than compensate for these. 
  • Bukit Sembawang’s 42% discount to RNAV today is much wider than the 14% trading discounts of its large-cap peers. It appears excessive considering its net cash of SGD236m, FY19E ROE of 14% and vast plots of legacy land.



VALUATION 


More upside for developer stocks; good value in mid-cap space. 

  • We see more upside for developer stocks in 2018E as Singapore’s property market continues its cyclical upturn. While we think UOL and CityDev remain the best large-cap proxies for this rebound, we see good value in the mid-cap space for investors with lower stock-liquidity thresholds. 
  • Bukit Sembawang (BS)’ 42% discount to RNAV looks excessive against the 14% trading discounts of its large-cap peers, UOL and CityDev. Moreover, we see stronger ROE prospects for BS than for its developer peers.

Target RNAV discount benchmarked to peers. 

  • Our TP of SGD8.25 is set at a 20% discount to its RNAV of SGD10.31. This is a larger discount than our target discounts of 0% and 10% for sector benchmarks, CityDev (CIT SP, CP SGD12.65, BUY, TP SGD13.80) and UOL (UOL SP, CP SGD8.72, BUY, TP SGD9.85). 
  • Our larger discount is to compensate for poorer corporate access, lower stock liquidity and the long time needed to fully develop its legacy land bank. That said, we believe Bukit Sembawang (BS)’ risk profile is lower than its peers considering an un-geared balance sheet with SGD236m of net cash. 
  • It is also under less pressure to overpay for land since it has a multi-year development pipeline from its legacy landbank.
    • Orchard Road and Telok Blangah. Going by ASPs of SGD2,300-2,500 psf achieved by GuocoLand (GUOL SP, CP SGD2.21, BUY, TP SGD2.95) for Martin Modern, a leasehold project, we think BS can potentially fetch SGD2,650 psf for 8 St Thomas, a freehold condo along River Valley Road. Another project, Paterson Collection, has not been officially launched, though one unit was sold to a director of the company in early 2017. Located within walking distance of the Orchard Road MRT station, this property could potentially fetch SGD3,000 psf, in our view. About 98% of Skyline Residences in Telok Blangah has been sold.
    • Sembawang and Seletar Hills. Luxus Hills is a 999-year landed-housing project in the Seletar Hills enclave. After successfully negotiating for a lifting of building restrictions on a land parcel at Nim Road last year, BS will be building 99-year landed houses dubbed Nim Collection at the location. Watercove, a freehold cluster-housing project, was launched in Sembawang earlier this year. Thirty seven of its 80 units have been sold.
    • Legacy land. Its legacy land in Seletar Hills can yield an estimated 1.1m sf of saleable land. Assuming an ASP of SGD1,750 psf for end-products and a net development margin of 10%, we believe interested developers could be willing to pay SGD830 psf for raw land in this area.


Sensitivity analysis. 

  • Our valuation is highly sensitive to selling prices in Singapore’s residential market. Our price assumptions for its legacy land have the biggest influence on our RNAV. Raising land values by 20% from our base case would lift our RNAV by 7% or 72 SGD cts. 
  • Assuming that ASPs for homes under development also rise by 20% from our base case, our RNAV will increase by 17% to SGD12.08.


COMPANY BACKGROUND


Business 

  • Singapore-based residential developer. Started building landed homes in 1950s and made a significant push into high-end condominiums in the late 2000s. Has built over 2,500 homes in Seletar Hills, 1,000 houses in Sembawang and 500 homes elsewhere.
  • Concentrated proxy for Singapore’s residential market. Almost all its assets are in Singapore’s residential market. Currently, BS has 295 landed homes and 335 condominium units under development. Its landed homes are located in Seletar Hills and Sembawang while its condos are in Singapore’s prime Orchard Road area. High-end condominiums completed in recent years included The Vermont on Cairnhill, Paterson Suites and Skyline Residences. Has not launched The Paterson Collection and 8 St Thomas even though they are substantially completed. Launched Watercove, a cluster housing project in Sembawang, in early 2017. Developing landed-housing projects, Luxus Hills and Nim Collection, in phases.
  • Legacy land bank. Owns vast plots of land in Seletar Hills and Sembawang. Last plot in Sembawang is being developed into Watercove. Remaining parcels in Seletar Hills can possibly yield 1.1m sf of saleable area, providing a multi-year development pipeline.

Company milestones 

  • Ventured into condominiums via enbloc purchases. Best known as a developer of high-quality landed housing. Ventured into high-end condominiums after purchasing eight enbloc sites from the market in FY06-08.
  • Rights and warrants. Tapped capital markets by raising almost SGD600m via a series of rights and warrants in FY06-12 to fund land acquisitions and development of various condominium projects.
  • Record sales and earnings in 2011/12. Capitalised on the market rebound after GFC by rolling out several high-end condominium projects: Paterson Suites, The Vermont on Cairnhill and Skyline Residences. Revenue and core earnings hit new records of SGD515m and SGD175m in FY11.

Board and senior management 

  • Chairman. Mr Koh Poh Tiong was appointed Chairman in Aug 2017. He is a director at various listed companies including Frasers and Neave, SATS, Raffles Medical and is Chairman of the National Kidney Foundation. Was previously CEO of the F&B division of Frasers and Neave and Asia Pacific Breweries.
  • CEO. Mr Ng Chee Seng has been with the company since 1994 and joined the board in 2007. Holds a Bachelor of Architecture degree and Master’s degree in Property and Maintenance Management from the National University of Singapore. Also a management committee member of the Real Estate Developers’ Association of Singapore.
  • Head of Finance. Mr Dennis Loh is Head of Finance and Company Secretary. Has been with the group since 2014. Holds a Bachelor of Accountancy degree from the University of Singapore and is a member of the Institute of Singapore Chartered Accountants.
  • Note: BS does not have a dedicated Investor Relations department.

Strong dividend track record 

  • Generous payouts. Historically pays good dividends. Has been returning surplus capital to shareholders via special dividends. Even after paying over 100% of its earnings in FY17, it still had SGD236m of cash and no debt in Sep 2017. This suggests room for further distributions.


FINANCIAL ANALYSIS


Cyclical rebound 

  • Housing sales have been fairly slow in the past four years as the market struggled with weak demand after the imposition of property-cooling measures. However, we believe the recent improvement in market sentiments should set the stage for an industry rebound in the next few years. Our home-sales forecasts are not aggressive and remain below the levels during the last market run-up in FY11-12.
  • Bukit Sembawang’s construction and delivery of presold homes in earlier years have been supporting its revenue recognition thus far. We see its revenue bottoming in FY18E before a cyclical rebound in the next two years. This should prop up its ROE to 14% in FY19-20E.

Potential surge in cash pile 

  • Bukit Sembawang has been debt-free since FY13. This is a rarity for property developers that typically require debt capital to finance their operations. 
  • As its condominium projects are almost completed and require minimal working capital, the sale of any new condominiums should immediately add to its cash pile. In the absence of fresh land acquisitions, we estimate that Bukit Sembawang’s cash could swell to over SGD800m by FY20E.

Dividends sustainable 

  • Its surging cash pile and the potential rebound in earnings suggest that Bukit Sembawang can comfortably sustain its annual dividend payout of 33 SGD cts - 4 cts ordinary + 29 cts special - over the next few years. This implies a yield of over 5%, the highest potential for developer stocks under our coverage.


RISKS


Overpaying for land and cost overruns. 

  • These are likely the biggest risks for a property developer today. Competition for land is fierce and overpaying for land could result in huge development losses. Developers are also at risk of cost overruns from poor execution.

Sharp fall in Singapore home prices. 

  • With almost all its assets in Singapore’s residential market, a plunge in home prices could lead to a decline in its asset value.

Regulatory risks. 

  • Property development is highly regulated and policy changes could affect its business. For example, tightening measures in recent years have dampened residential demand. Forced acquisition of its legacy landbank at unfavourable prices is also another risk.

Interest rates. 

  • Spike in interest rates could hurt demand for property, though they should not lead to higher financing costs for the company as it has no gearing.

Slow asset turnover, cash hoarding. 

  • Given the low carrying value of its legacy landbank, the company could potentially sit on its land without active development. 
  • It could also choose to hoard cash and not return surplus capital to shareholders. Stock investors would then be faced with persistently low returns.






Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-12-13
Maybank Kim Eng SGX Stock Analyst Report BUY Initiate BUY 8.25 Same 8.25



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