Chip Eng Seng Corporation Ltd - Phillip Securities 2017-12-18: Riding The SG Property Cycle Well

Chip Eng Seng Corporation Ltd - Phillip Securities 2017-12-18: Riding The SG Property Cycle Well CHIP ENG SENG CORPORATION LTD C29.SI

Chip Eng Seng Corporation Ltd - Riding The SG Property Cycle Well

  • Leveraged to the upcycle in Singapore residential property market with available inventory and a replenished land bank.
  • Close to S$200mn (33% of market cap) worth of unbilled development profits to be recognized over the next 3 years from Singapore residential projects already sold.
  • Maintain BUY. We raised our target price to S$1.21 (see report dated 09-Nov-2017), as we narrow the discount to RNAV from 50% to 40% and incorporated construction business into our target price.



BACKGROUND

  • Chip Eng Seng (CES) is one of Singapore’s leading main contractors and property developers, listed on the SGX Mainboard since 1999. 
  • It started as a subcontractor firm for conventional landed properties in the 1960s, and has since built up a good reputation for quality and reliability. In 1982, Chip Eng Seng won its first HDB project as a main contractor, which eventually paved the way to it being awarded the contract for the iconic Pinnacle @ Duxton, which has since been completed. 
  • Chip Eng Seng is principally engaged in the following business segments, namely real estate development, construction, hospitality and property investment.


INVESTMENT MERITS / OUTLOOK


1. Leveraged proxy to current upcycle in Singapore residential property market. 

  • Chip Eng Seng (CES) is poised to capture upswing in Singapore residential property prices with a well-stocked land bank and available inventory.
  • Close to S$200mn (33% of market cap) worth of unbilled development profits will be recognized over the next 3 years from already sold Singapore residential projects. This excludes any potential gains from the Woodleigh Lane GLS land site and Changi Garden en-bloc won this year. 
  • Further catalyst could come from healthy take-up rates at the Woodleigh site due for launch in 2H18, with potential estimated development profits of S$127mn (CES’ 60% stake).

2. Construction business equipped with two years revenue visibility and with a private sector demand picking up. 

  • With an order book of S$458mn, Chip Eng Seng’s construction segment provides two years of income visibility. With 17,000 new built-to-order HDB flats (stable YoY) slated for launch in 2018 and private sector demand picking up, opportunities abound for CES to replenish and build on its order book in the coming year.

3. Cancellation of Melbourne Tower purchase contracts could enable Group to move on with other exit options. 

  • Management is exploring other viable exit options with regard to this property and any materialized profits will be accretive to our RNAV. Assuming 24% development margins, development profits could add 12c to our RNAV. 
  • In view of the uncertainties surrounding the project, we will not factor in any contributions from Tower Melbourne until we get further clarity.


RECOMMENDATION

  • Our RNAV has incorporated the valuation of the Group’s construction arm, as we believe we are approaching sector cycle bottom. In view of the current upcycle in the property market, we have narrowed the discount to RNAV from the previous 50% to 40% for mid-cap developers under our coverage. 
  • Chip Eng Seng (CES) remains a good proxy to the upcycle in the Singapore residential market with its proven track record in execution and well-stocked land bank, in particular, the Woodleigh site due for launch in 2H18, with an estimated GDV of S$720mn (60% stake). 
  • Good take-up rates at the launch would be a potential price catalyst.









Dehong TAN Phillip Securities | http://www.poems.com.sg/ 2017-12-18
Phillip Securities SGX Stock Analyst Report BUY Maintain BUY 1.210 Same 1.210



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