Perennial Real Estate Holdings - CIMB Research 2018-02-08: Twin Growth Drivers

PERENNIAL REAL ESTATE HLDGSLTD 40S.SI

Perennial Real Estate Holdings - Twin Growth Drivers

PREH's 4Q/FY17 earnings broadly in line, at 47%/93% of our FY17 projections
Increased strata office sales in Singapore and recurrent income in China
Development projects to complete largely from FY19F onwards, healthcare operations gaining momentum
Maintain ADD and Target Price of $1.12.

Perennial Real Estate Holdings (PREH) reported a 25.7% y-o-y drop in 4Q17 revenue to S$16m while net profit came in 8% higher y-o-y at S$27.6m. Results were boosted by fair value gains from China and Singapore investment properties. Excluding one-off items, 4Q core operations show net loss of c.S$20m, in our estimate.
For FY17, net profit jumped 186% y-o-y on fair value gains, divestment and re-measurement profits from the sale of partial stake in TripleOne Somerset.
The group proposed a final DPS of 1 Sct, translating to a yield of 1.2%.

Singapore revenue made up 27% of revenue and 44% of EBIT in FY17, driven by rental income from CHIJMES as well as strata sales of units at TripleOne Somerset (TOS) and AXA Tower (AXA).
PREH achieved S$58m of office strata sales in FY17. There was healthy demand for office space, with renewals and new leases making up 27.3% of TOS and 47.4% of AXA's lettable area.

China operations accounted for 44% of FY17 revenue and 49% of EBIT, boosted largely by higher income from Perennial Qingyang Mall in Chengdu.
The Perennial International Health and Medical Hub (PIHMH) has secured committed occupancy of 84.6%. Mini anchor tenant Care Alliance Rehabilitation Hospital of Chengdu soft opened its centre in 4Q17 while other tenants are in various stages of fit-outs and PREH expects them to commence operations in 1H18F.

The group will continue the strata sales and asset enhancement initiatives (AEIs) at TOS and AXA in Singapore in FY18. In Jan 2018, it entered into a settlement agreement to resolve the deadlock for the Capitol project.
In China, development activities are ongoing in Beijing Tongzhou, Chengdu and Xian, with completions scheduled to be in phases from 2019F onwards. This should drive forward recurring and development contributions, in our view.

Within its nascent healthcare arm, PREH will focus on hospitals/medical centres as well as eldercare/senior housing segments as part of its vision to be an international medical services provider in China. Its eldercare unit has 3,577 operating beds at end-FY17, and aims to add 3,132 beds in FY18.
Meanwhile, it has established a US$1.2bn JV to invest in healthcare integrated mixed-use developments connected to high-speed railways in China’s Tier 1 or strong Tier 2 cities. The first close of the JV fund is at US$500m.

We retain our FY18-19 earnings estimates and ADD rating. We expect FY18F earnings to benefit from additional rental contributions in China while development contributions are likely to be felt from FY19F onwards.
Our Target Price of S$1.12 is based on a 40% discount to RNAV.
Upside catalyst could come from the resolution of its Capitol project and faster-than-expected leasing of PIHMH.
Downside risks include construction delays for ongoing projects.

LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2018-02-08

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.12 Up 1.080