Chip Eng Seng - DBS Research 2018-02-14: Attractive Valuations And Yield

Chip Eng Seng - DBS Vickers 2018-02-14: Attractive Valuations And Yield CHIP ENG SENG CORPORATION LTD C29.SI

Chip Eng Seng - Attractive Valuations And Yield

  • Chip Eng Seng's FY17 revenue and PATMI of S$859.7m and S$35.5m came in within expectations on higher development sales.
  • Spotlight for 2018 and 2019 remains on upcoming launches at Woodleigh and Changi.
  • Meanwhile, growing recurring income and strong dividend track record (even in 2009) are attractive attributes; Proposes 4 Sct dividend for FY17, representing 4.2% yield.
  • Maintain BUY with Target Price of S$1.18.

Integrated real estate developer with strong capability to leverage upcoming property upturn. 

  • Singapore-based Chip Eng Seng Corporation (CES) has been selectively acquiring projects in Singapore and overseas which are ripe for the picking. Most of the group’s residential projects have already been substantially sold and, together with an estimated construction order book of S$560m (as at Jan 2018), CES has locked in at least S$1bn in sales – which will be recognised progressively, underpinning strong earnings visibility in the coming years.
  • Meanwhile, plans to launch recently acquired residential sites at Woodleigh and Changi in 2H18 and 1H19 respectively, should boost the group’s earnings and NAV in the medium term.

Where we differ: 

  • A largely uncovered stock, we like CES for its strong earnings visibility and the potential to unlock its undervalued hotel portfolio.

Potential catalysts: Successful pre-sales, landbanking activities 

  • Potential unlocking of undervalued hotel portfolio. The group has also built up a sizable hotel and commercial portfolio. The jewel is Park Hotel Alexandra, which is recorded in its book at an estimated S$210m (S$475k/key) but potential realisable value, if sold, could be as high as S$376m (S$850k/key), which means a 27Scts upside to current NAV. 
  • While the hotel provides stable recurring cash flow to the group, substantial value could be unlocked, given the robust demand for hotel assets in Singapore.


  • Maintain BUY and SOTP-based Target Price of S$1.18. 
  • Assuming a conservative 45% discount (vs larger peers’ 10%) to RNAV of S$1.88 and valuing its construction business at peers’ average of 8x FY18F PE, we arrive at a SOTP-based Target Price of S$1.18. 
  • A prospective 4.2% yield is also on offer.

Key Risks to Our View

  1. Execution risk,
  2. Weaker demand,
  3. Competition,
  4. Equity fund raising risk.

WHAT’S NEW - Chip Eng Seng’s FY17 results in line; Maintains 4 Sct dividend 

FY17 PATMI of S$35.5m; Results in line. 

  • In 4Q17, CES delivered PATMI of S$14.5m on revenue of S$256.1m (+22.4% q-o-q), primarily on stronger contributions from the Property Development and Hotel segments, which helped offset weakness in the Construction division. On a full-year basis, revenue was up 14.9% to S$859.7m, while earnings (PATMI) held relatively steady y-o-y at S$35.5m, in line with our expectations.
  • The Property Development segment was the key revenue driver for the group this quarter, contributing S$194m (or c.76% of sales) on the progressive recognition of ongoing development projects (High Park Residences and Grandeur Park Residences) and proceeds from the handover of completed townhouses in Doncaster, Melbourne, which should continue to contribute positively to 1Q18 revenue.
  • The Hospitality division continued to gain traction during the quarter, gaining 31.8% q-o-q to S$13.7m on the back of higher occupancies for its key hotel assets, Park Hotel Alexandra (Singapore) and Grand Park Kodhipparu (Maldives), which only commenced operations in June 2017. Contributions from a newly-added asset, The Sebel Mandurah in Australia, also helped.

Expanding investment portfolio to further boost recurring income. 

  • While dwarfed at the top-line (c.6.1% of sales), we estimate that CES’ portfolio of investment assets roughly contributed c.13% of FY17 EBIT.
  • With the recent addition of a Grade-A office building at 205 Queen Street (Auckland) at end-2017 and the proposed acquisition of its fourth hospitality asset, Mercure & Ibis Styles Grosvenor Hotel in Adelaide, we believe contributions from this segment will be even more meaningful in FY18F.
  • Proposes 4Sct dividend for FY17, which is expected to be paid on 23 May 2018.

Maintain BUY with Target Price of S$1.18; Offers attractive 4.2% yield.

  • Apart from the strong earnings visibility from ongoing development projects and the potential unlocking of its undervalued hotel portfolio, we also like CES for its strong dividend payment record. 
  • Notably, the company has consistently paid dividends through the property cycle – even in 2008/2009, and has maintained a fixed dividend of 4 Scts over the last eight years.

Carmen TAY DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2018-02-14
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.180 Same 1.180