Perennial Real Estate Holdings - CGS-CIMB Research 2018-08-06: Making Slight Progress

PERENNIAL REAL ESTATE HLDGSLTD SGX:40S

Perennial Real Estate Holdings - Making Slight Progress

Perennial Real Estate Holdings’ 2Q/1H18 core net profit was below our projections.
Perennial International Health and Medical Hub (PIHMH) opened in Jun; other China development projects are being progressively developed.
Singapore properties enjoyed high occupancy; Capitol Kempinski Hotel to open in Oct.
Maintain ADD with an unchanged Target Price of S$0.99.

Perennial Real Estate Holdings (PREH) reported a 2Q18 EBIT of S$41.9m, -26.5% y-o-y, on a 1.6% improvement in revenue to S$18.1m. Stripping out revaluations and other one-off gains, EBIT would have been marginally higher y-o-y.
Net profit fell a greater 49.5% y-o-y to S$8.6m, eroded by lower EBIT and higher finance cost due to the consolidation of Capitol Singapore’s debt and new loans to fund new investments.
For 1H, net profit came in at S$13.8m, -75.3% y-o-y. Excluding one-offs, we estimate the group would have recorded a core net loss in 1H18 of S$12.9m, below our expectations.

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Topline improvement came from the consolidation of Capitol Singapore’s revenue, improved performance at Perennial Qingyang Mall and Perennial Jihua Mall, as well as new contributions from Perennial International Health and Medical Hub (PIHMH), which commenced operations in Jun 2018. The latter achieved committed occupancy of c.92.8% at end-2Q18.

Construction activities at other development projects, such as in Beijing Tongzhou, are ongoing, with all six construction permits obtained. P1 and P2 are expected to complete in 2021 and 2020.
In Xian North, tower façade cladding works are in progress on Plot 4 and excavation works are ongoing at Plot 5. PREH’s 45% JV vehicle was awarded a Rmb718m land tender in Tianjin to develop 3 plots adjacent to the Tianjin South High Speed Railway.
These projects should impact the bottomline from the next 2-3 years.

Meanwhile, in Singapore, AXA Tower had a committed occupancy of 90.8% at end 2Q18 while CHIJMES was 98.4% occupied.
In tandem with the buoyant office investment market, PREH is also exploring enbloc sale opportunities for AXA Tower. It has started the revamp of Capitol Piazza with two new first-in-Singapore F&B names and has appointed Kempinski to operate the Capitol Kempinski Hotel Singapore, scheduled to open on 1 Oct 2018. Booking channels for the hotel opened from 15 Jul 2018.

Post consolidation of Capitol Singapore’s financials, PREH’s net debt stands at S$2.9bn or a net debt-to-equity ratio of 0.74x, while weighted average interest cost is at 3.7%.
The group has S$666m of loans expiring in the remainder of this year, of which S$300m is a retail bond due in Oct 18.

We leave our FY18-20F earnings estimates unchanged and maintain ADD rating. Our Target Price of S$0.99 is based on a 50% discount to RNAV.
Potential catalyst is faster-than-expected ramp-up of Capitol Singapore and the China development projects, while downside risks include slower-than-expected operational improvements.

LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2018-08-06

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