Chip Eng Seng (CHIP SP) - DBS Research 2018-02-01: Expansion In Order Book And Scope From New Contract Win

Chip Eng Seng (CHIP SP) - DBS Vickers 2018-02-01: Expansion In Order Book And Scope From New Contract Win CHIP ENG SENG CORPORATION LTD C29.SI

Chip Eng Seng (CHIP SP) - Expansion In Order Book And Scope From New Contract Win

  • Construction order book grows 37% (from S$458.4m at end-3Q17) on new S$168m HDB contract win.
  • Marks Chip Eng Seng’ first construction project with a design element, which generally offers higher margins.
  • No material impact on FY18F earnings but medium term earnings visibility improves; provides further support to maintain 4 Scts dividend.
  • Maintain BUY and SOTP-based Target Price of S$1.18.

What’s New 

Significant boost to net construction order book and portfolio. 

  • The award of a S$168m contract by the Housing & Development Board (HDB) for an upcoming public housing development at Sengkang provided a significant c.36.6% boost to Chip Eng Seng’s construction net order book, from S$458.4m as at 30 Sep 2017 to c.S$626.4m currently.

Enhanced portfolio bodes well for upcoming tenders.

  • Comprising both design and construction elements, this contract also marks the group’s first construction project with an enhanced scope, which generally offers higher margins.
  • Earlier this month, BCA projected public sector construction demand to grow from S$15.5 bn in 2017 to between S$16- 19bn in 2018. 
  • On the back of the anticipated increase in public sector projects in 2018, execution on this project should further enhance CES’ portfolio and track record, and put the group in good stead for upcoming tenders.

Contract to be carried out over 3.5 years, providing visibility into 2021. 

  • The first part of the contract is mainly centered around the design phase, as well as the relocation of bus shelters and construction of bus bays, and is scheduled for completion by November 2018 (approximately 10 months).
  • Meanwhile, the second part – which represents the bulk of the contract value - involves the construction of 10 residential blocks, two carparks and community facilities/services, and will span approximately 32 months (estimated completion in June 2021).

Construction revenues will add 4/28% over FY18F/19F; no material impact on FY18F earnings. 

  • We estimate that this contract win could raise construction revenues by 4%/28% in FY18F/19F.
  • Better than expected execution and integration of the design and construction phases could also provide an uplift to margins.

Maintain BUY, SOTP-based Target Price of S$1.18 (based on 45% discount to RNAV and 8x FY18F PE for construction business). 

  • Given that the bulk of the contract value will only be unlocked upon commencement of Phase 2, the project is unlikely to have a material impact on FY18F earnings but nevertheless, provides improved earnings visibility over the medium term (into 2021).
  • Coupled with a steadily growing recurring income pool, we believe this provides support for dividends to at least be maintained at the historical average of 4 Scts per share. At current Chip Eng Seng share prices, this represents prospective yield of c.4%.

Derek TAN DBS Vickers | Carmen TAY DBS Vickers | 2018-02-01
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.180 Same 1.180