Chip Eng Seng - DBS Research 2018-08-06: Strong 2Q18 Performance But Uncertainty Over Sell-through Rates Remains

CHIP ENG SENG CORPORATION LTD SGX:C29

Chip Eng Seng - Strong 2q18 Performance But Uncertainty Over Sell-through Rates Remains

Chip Eng Seng (CES)’s 1H18 net profit jumped 181.9% y-o-y to S$17.2m, on the progressive handover of Australian properties.
Uncertainty over sell-through rates for Park Colonial and Changi Garden (FY19F launch).
Meanwhile, rising proportion of recurring income streams (including proposed Education venture, if successful) could provide some relief.
Maintain FULLY VALUED with Target Price of S$0.75.

Chip Eng Seng (CES)’s 1H18 net profit jumped 181.9% y-o-y to S$17m from S$6m in 1H17, mainly due to higher revenue from property development (+41% y-o-y) and hospitality (+131% y-o-y), offset by drops from construction (-30% y-o-y), and property investments & others (-36% y-o- y).
For 2Q18, Chip Eng Seng recorded net profit of S$11m vs S$2.5m loss in 2Q17 post restatement. Similarly, the strong performance in 2Q18 was led by both the property development and hospitality sectors.
Property development recorded strong growth on the handover of Australian residential units sold previously. Property development recorded strong growth mainly on the progressive handover of townhouses of Williamsons Estate in Doncaster, Melbourne (unlike Singapore, sales are recognised upon completion in Australia) and some progressive revenue recognition from High Park Residences and Grandeur Park Residences in Singapore.
Meanwhile, construction revenue fell mainly due to timing of construction works where older projects in Tampines and Woodlands are nearing completion while Bidadari projects are at an early stage.

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Led by acquisitions (The Sebel Mandurah and Mercure & Ibis Styles Grosvenor Hotel in Australia) and the opening of Grand Park Kodhipparu Resort (Maldives) in June 2017, Chip Eng Seng’ Hospitality division exhibited strong growth of c.115% y-o-y to S$15.3m in 2Q18.
While contributions from Property Investments fell 35.2% y-o-y to S$1.9m following the divestment of 420 St Kilda Road in Aug 2017, we note that the proportion of recurring revenue streams has increased to 6.9% (2Q18) from 4.7% (2Q17) – notwithstanding the significant boost in associate contributions post the successful acquisition of a 50% stake in a New Zealand office tower in Aug 2017.

In Singapore, projects launched before the tightening measures recorded strong sales with Grandeur Park 96.4% sold and Park Colonial 52.6% sold. The management believes the tightening measures will affect market sentiment and it will take a cautious stance in replenishing its landbank.
In Australia, all remaining units sold (97.7% sold to-date) will be handed over by 3Q2018. With the completion of Williamsons Estate, management launched Fifteen85 (South Melbourne project) at the end of 2Q18.

Total construction orderbook fell to S$480m vs S$525m in 1Q18 as there were no new significant construction projects clinched.

Apart from organic growth and further M&As in this space, we believe that Chip Eng Seng’ proposed Education venture could help unlock a new recurring income stream for the group over the medium term, but this is not without risk.
To recap, Chip Eng Seng entered into a collaborative agreement with Repton International (subsidiary of UK-based private day and boarding school) on 25 April. On 21 May, the group also proposed the acquisition of up to 75% stake in American Scholar Group, an education consulting company which facilitates study-in-America opportunities and cross-cultural experiences for international students and educators.
Most recently, on 20 July, Chip Eng Seng also proposed the acquisition of a 70% stake in White Lodge Education Group Services, which operates a chain of pre-school centres in Singapore (7) and Malaysia (2).
We understand that Chip Eng Seng has yet to identify firm targets for the introduction of its Childcare facilities but is inclined to open a Repton-branded kindergarten within 18 months of entering into the collaborative agreement. Further, given that childcare operators typically take 18-24 months to breakeven, it will take time before this segment contributes positively to bottom-line.
Meanwhile, capex for start-up related expenses are expected to kick in. Pending further clarity on Chip Eng Seng’ approach to growing its Education business, we have yet to factor in contributions or capex from this segment.

Maintain Fully Valued with Target Price of S$0.75 as uncertainty over sell-through rates for the upcoming Changi Garden site (poised for launch in FY19F) and remaining units at Park Colonial remain.

Carmen TAY DBS Group Research Research | Derek TAN DBS Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2018-08-06

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