First Sponsor Group - DBS Research 2018-07-30: Summer In Europe

First Sponsor Group - DBS Group Research Research 2018-07-30: Summer In Europe FIRST SPONSOR GROUP LIMITED SGX:ADN

First Sponsor Group - Summer In Europe

  • First Sponsor Group’s 1H18 net profit grew 24% y-o-y from newly acquired hotels and property financing; European income doubled.
  • Oliphant and Munthof achieved 59% and 100% pre-commitment respectively at record-high rental rates.
  • Property financing loan book increased 36% q-o-q.
  • Acquired new land bank in Dongguan, China with Vanke.



Maintain BUY; Target Price of S$1.62.

  • We maintain our BUY rating and Target Price of S$1.62 (based on 35% discount to RNAV).
  • First Sponsor is one of the rare property developers listed in Singapore that will benefit from higher demand fuelled by post-Brexit relocation to Netherlands.
  • Our Target Price of S$1.62, which offers potential upside of 31%, is based on a fully diluted RNAV. If its undiluted RNAV is used, First Sponsor’s fair value would be S$1.99, thus giving potential upside of 60%.
  • BUY!



~ SGinvestors.io ~ Where SG investors share

Where we differ: Poised to benefit from potential post-Brexit relocation to the Netherlands.

  • We are the first brokerage to initiate coverage on First Sponsor, highlighting its exposure to the Netherlands's residential and commercial properties which stand to benefit from higher demand stemming from potential post-Brexit relocation to the Netherlands. 
  • First Sponsor currently owns 13 properties/projects in the Netherlands (mainly in Amsterdam) and one hotel property in Frankfurt, Germany.


Potential catalysts:

  • Sales and completion of development properties, rising rental rates/RevPAR, and delivery of strong earnings growth. 1H18 net profit +24% y-o-y from newly acquired hotels and property financing. 1H18 net profit grew 24% y-o-y to S$29m and is only 33% of our FY2018F estimates, impacted by the timing in recognition of sale of properties. 
  • Net profit growth was led by contributions from newly acquired hotels and higher contributions from property financing (loan book +36% q-o-q). 1H18 income from European property portfolio has doubled from newly acquired hotel and office assets. It acquired a new land bank in Dongguan, China with partner Vanke.


Valuation: 

  • We reiterate our BUY call with an unchanged Target Price of S$1.62 based on a 35% discount to RNAV of S$2.49 and calculated on a fully diluted basis. 
  • The stock currently trades at 0.7x FY18F P/BV.


Key Risks to Our View: 

  1. Less-than-expected spillover impact post Brexit,
  2. Delay in completion of projects,
  3. Default risk in property financing, and
  4. Acquisitions of fewer desirable investment properties.


WHAT’S NEW - Liberty to shine


1H18 net profit grew 24% led by contributions from newly acquired hotel assets and higher contributions from property financing segment.

  • First Sponsor Group’s 1H18 net profit grew 24% y-o-y to S$29m and is only 33% of our FY2018F estimates, impacted by the timing in recognition of sale of properties. Net profit growth is in line with a 20% y-o-y increase in gross profit and higher net interest income of 8% y-o-y following higher interest income from fixed deposits and structured deposits and lower finance costs from cross-currency swaps (CCCs).
  • First Sponsor Group’s gross profit improved despite 1H18 revenue falling 34% y-o-y mainly led by higher contributions from newly acquired hotel assets; namely Bilderberg Portfolio (acquired in August 2017), Hilton Rotterdam Hotel and Le Meridien Frankfurt Hotel (acquired in January 2018), and higher contributions from third property financing mainly from the recognition of S$12.7m net penalty interest and interest from higher disbursement for new third-party financing loans, offset by lower recognition of sale of properties following the timing of handover of completed residential units.
  • Revenue from sale of properties fell 82% y-o-y as the Millennium Waterfront project recognised only 62 residential units, three commercial units and 155 car parks in 1H18 vs 919 residential units, 35 commercial units and 80 car park lots in 1H17.
  • First Sponsor Group’s 2Q18 net profit grew 29% y-o-y to S$12m led by higher contributions from newly acquired hotel assets and third property financing mainly from the recognition of S$5m net penalty interest and interest from higher disbursement for new third-party financing loans in 2Q18, which was offset by lower recognition of sale of properties following the timing of handover of completed residential units.

1H18 income from European property portfolio doubled.

  • First Sponsor Group’s 1H18 income from European property portfolio doubled to S$28m mainly from its European hotel income which grew to S$17m vs S$3m in 1H17 following contributions from newly acquired hotel properties, Bilderberg Portfolio, Hilton Rotterdam Hotel and Le Meridien Frankfurt Hotel. Both the Dutch Hotels are recording higher occupancy rates with RevPar growing at 8% and 16% y-o-y. 
  • The Dutch office income remained relatively stable y-o-y at S$11m with lower rent contribution from Mondriaan Tower arising from temporary vacancy offset by income contribution from newly acquired Meerparc office in late 2017.

Net debt-to-equity increased to 0.4x.

  • First Sponsor Group’s net debt-to-equity increased to 0.4x from 0.3x in FY2017 mainly due to higher borrowings to fund new acquisitions, offset by the issuance of S$161.5m Perpetual Convertible Perpetual Securities (PCCS). Management expects gearing to increase as property financing loan book continues to grow given the strong property financing opportunities seen in 2Q18.

Declared 1-Sct interim dividend.

  • First Sponsor declared a 1-Sct interim dividend, flat y-o-y. However, the total dividend payout has increased due to 10% bonus shares issued in April 2018.


Business Review/ Outlook


Star of East River Project, Dongguan (SoER) almost fully sold two new blocks launched in 2Q18.

  • Two new residential blocks in SoER project was launched for sale in 2Q18 with one block fully sold while the second block was 93% sold within the quarter. Total take-up rates for the project stood at 98.8% as at 2Q18. The remaining two SOHO blocks (more than 2,300 units) are expected to be launched in 2H18/2019.

Won a new land bid in Dongguan together with Vanke.

  • In 2Q18, First Sponsor (with more than 20% stake) partnered Vanke and won a new land bid in Dongguan for RMB2.6bn (at RMB17.7 psqm). The development is in a prime location, close to the Dongguan municipality office (1.5km away). The project is expected to launch its first phase by year-end.
  • Management believes that the new land bid will allow them to benefit from strong demand due to residential supply crunch in Dongguan.

Oliphant and Munthof are 59% and 100% pre-committed at new record rental rates.

  • The office buildings in Amsterdam, Oliphant and Munthof, both with increased NLA post redevelopment, have successfully achieved 59% and 100% pre-committed levels and management is in advanced discussion with another potential tenant at Oliphant. We understand rental rates signed are new record levels in the respective areas. The office buildings are expected to be completed by early 2019 and end-2018 respectively.
  • Despite the strong demand in office leases, European office assets have re-rated with acquisition bids increasingly becoming more competitive, especially those in the Netherlands and Germany. While management will continue to explore attractive and accretive opportunities, management remains disciplined in its bids.

Strong increase in property financing opportunities.

  • Management saw a huge increase in demand for property financing given the increased credit tightening in China. Its property financing loan book has increased 36% q-o-q to RMB1.6bn (S$337m) and management expect the loan book to continue to grow at this rate in the next few quarters.
  • Management said that this opportunity is rare as they are seeing increasing interests from strong borrowers with good, unique and prime location properties in China.
  • On the default loan cases, First Sponsor has recovered more than 99% of the loans and interest charges for Case 2 and is hopeful that Case 1 will close in 2019. Management are confident that they would recover the principal amount but at a slightly lower interest rate for Case 1.

Divestment gains to be recognised in 2H18.

  • In May 2018, First Sponsor divested certain parts of Chengdu Cityspring (including M Hotel) for RMB465m (S$97.4m) to be paid in three tranches. Tranches 1 and 2 will be completed in 2H18. In July 2018, First Sponsor disposed Bilderberg Landgoed Lauswolt Hotel for EUR6.9m (S$11m at 2.9x its book value). 
  • We estimate that total divestment gain to be recognised in 2H18-1H19 is S$25m, which has yet to be accounted for in our estimates.


Maintain BUY rating; Target Price of S$1.62.

  • We maintain our BUY rating and Target Price of S$1.62. First Sponsor is one of the rare property developers listed in Singapore that will benefit from higher demand fueled by post-Brexit relocation to Netherlands. 
  • In addition, its development projects in Dongguan and Chengdu, China continue to sell well and has recently acquired a land bank in Dongguan with a strong Chinese local developer, Vanke to ride on the strong demand due to supply crunch in Dongguan. Its wild card stems from growth in its third-party property financing given the liquidity tightening in China.
  • Key catalysts include
    1. new acquisition of attractive and accretive investment properties in Europe,
    2. strong sales and completion of development properties,
    3. rising rental rates/RevPAR, and
    4. delivery of strong earnings growth.





Rachel TAN DBS Group Research Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-07-30
SGX Stock Analyst Report BUY Maintain BUY 1.620 Same 1.620



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