Chip Eng Seng - DBS Research 2018-07-06: Ambitions On Hold?

Chip Eng Seng - DBS Vickers 2018-07-06: Ambitions On Hold? CHIP ENG SENG CORPORATION LTD SGX: C29

Chip Eng Seng - Ambitions On Hold?

  • Fresh round of property cooling measures a dampener on Chip Eng Seng (CES)’s newly launched Park Colonial, which drew a strong crowd last weekend.
  • Lowering assumptions for Singapore projects slightly; heightened uncertainty to weigh on investor sentiment.
  • Historical trend suggests that Chip Eng Seng could trade at 0.56x P/BV, or -1 SD of its historical range, implying potential 16% downside.
  • Downgrade to FULLY VALUED; Target Price cut to S$0.75.

Downgrade to FULLY VALUED; Target Price lowered to S$0.75.

  • With the hike in ABSD rates and tightening of mortgage LTVs, we believe that the combination of these two property curbs could hit buyer sentiment significantly.
  • Likewise, given heightened uncertainty on sell-through rates for Park Colonial which was launched just a week ago, Chip Eng Seng’s share price is likely to be weak in the immediate term. io. As such, we expect Chip Eng Seng to trade at – 1 SD (or 0.56x) of its historical P/NAV range going forward, implying potential downside of c.16%.
  • Accordingly, our Target Price is cut from S$1.18 to S$0.75 as we lower sales assumptions and construction margins slightly and impute a higher discount of 65% to RNAV from 45% previously. Downgrade to FULLY VALUED.

Where we differ:

  • A largely uncovered stock, we like Chip Eng Seng 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.


Substantial proportion of ongoing developments pre-sold ahead of completion.

  • The progressive sale and revenue recognition from six available-for-sale development properties provides earnings visibility over the next few years. Recent launches have been well received. 
  • As at 31 Dec 2017, a substantial proportion of units at ongoing developments were pre-sold ahead of their completion – at least 87.5% for Grandeur Park Residences (which was only launched in March 2017) to 100% for High Park Residences (a collaboration between Chip Eng Seng (CES), Heeton Holdings, and KSH Holdings).

Growing landbank signals earnings potential beyond 2021.

  • Beyond the existing development projects, we believe that Chip Eng Seng (CES)’ unutilised landbank is indicative of the group’s longer-term earnings potential and cash flow generation capability. 
  • While the majority of CES’ landbank currently lies in Australia, its recently launched Park Colonial project and upcoming Changi Garden site (which is slated for launch in 1H19) in Singapore – which boasts an estimated combined GDV of close to S$1.5 bn could face heightened uncertainty in the immediate term following the introduction of a new round of cooling measures by the Singapore government.

Net construction order book estimated at S$560m.

  • Chip Eng Seng (CES)’ construction revenues are mainly derived from Singapore public housing, public transport infrastructure, and private residential projects. While local construction outlook still appears favourable at this juncture, the extent to which CES is able to truly benefit from these positive trends hinges upon the success and viability of its tenders.
  • Following its recent S$168m contract win in Jan 2018, we estimate CES’ construction order book to be closer to S$560m (vs S$397.1m at end-4Q17).

Recurring income pool to see further boost on steady expansion in Hotels and Investments portfolio.

  • Over the years, Chip Eng Seng (CES) has been increasingly active in the management of its hotel and investment portfolio, resulting in a growing asset base (to c.9 properties at end-FY17) and higher recurring income. 
  • With the recent addition of 4.5-star The Sebel Mandurah (purchase includes strata restaurant property) in Nov 2017 and a Grade-A office building at 205 Queen Street, Auckland - through a 50%- joint venture with Roxy-Pacific - we estimate that CES’ recurring income base would see a 20% boost y-o-y to c.S$58.5m in FY18F. io. This would represent approximately 6.7% of consolidated revenue, up from 5.1% in FY16. 
  • Further acquisitions, including the completion of its proposed acquisition of Mercure & Ibis Styles Grosvenor Hotel in Adelaide, could provide more upside.

Balance Sheet:

  • Net gearing could rise from 0.9x in FY16 to c.2.2x following recent en-bloc and land tender wins. While this appears high at first look, successful sale of units for Park Colonial and Changi Garden site should alleviate concerns over its gearing levels.

Share Price Drivers:

Earnings accretive acquisitions.

  • Potential transactions in Singapore hotel space could spark revaluation of Chip Eng Seng’s Park Hotel Alexandra. On the back of strong transaction velocity in the office sector, investor attention has been moving to the hotel sector. 
  • Given robust demand for hotel assets in Singapore, we believe the potential realisable market valuation for Park Hotel Alexandra would be c. S$850 a key (when pegged to peers’ average) or close to S$376m vs current book value of c.S$210m.

Key Risks:

  • Weaker demand for private residential property across Chip Eng Seng’ key markets of Singapore and Australia could impact the success of its future launches significantly.

Keen competition across Property Development and Construction segments.

  • Judging by the recent spike in en-bloc tenders at record sale prices and heightened competition for landbank, land prices are expected to rise further. This could impact CES’ ability to replenish its landbank (at a reasonable price), which is imperative for future profitability and growth.
  • Meanwhile for the construction business, we note that EBIT margins have come off over the years and remain watchful of the competitive landscape in the local construction sphere as this could lead to more aggressive bidding among contractors and ultimately, compression of margins.

Possible equity fund-raising to pare down debt.

  • We project that net gearing will rise to 2.2x over the next two years on the back of a rise in landbanking activity, which are primarily covered by loans. We believe that the company could potentially look at equity fund-raising ahead to pare down gearing to a more sustainable level.

Carmen TAY DBS Vickers | Derek TAN DBS Vickers | Rachel TAN DBS Vickers | https://www.dbsvickers.com/ 2018-07-06
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