First Sponsor Group - DBS Research 2018-11-01: Delivering As Promised

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FIRST SPONSOR GROUP LIMITED (SGX:ADN)

First Sponsor Group - Delivering As Promised

• First Sponsor Group's 9M18 net profit +20% y-o-y from property financing and newly acquired hotels; European income rose 64%.
• Star of East River (SoER), Dongguan fully sold six residential blocks; 72% of launched SOHO units; new project to launch by year-end.
• Property financing loan book +20% q-o-q to RMB1.9.
• Divested four hotels for EUR16.7m; expected to complete by end-2018/January 2019.

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!

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.
• 9M18 net profit +20% y-o-y from property financing and newly acquired hotels. 9M18 net profit grew 20% y-o-y to S$55m and is only 64% of our FY18F 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 +20% q-o-q).
• 9M18 income from European property portfolio rose 64% y-o-y from newly acquired hotel and office assets. It divested four hotels in Europe.

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:

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

WHAT’S NEW - Delivering as promised

9M18 net profit grew 20% led by contributions from newly acquired hotel assets and higher contributions from property financing segment.

• First Sponsor Group's 9M18 net profit grew 20% y-o-y to S$55m and is only 64% 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 (+18% y-o-y) and partially contributed by higher margins from a bigger proportion of profit contribution from property financing segment (43% in 9M18 vs 8% in 9M17).
• Gross profit improved 18% y-o-y despite 9M18 revenue falling 29% y-o-y mainly led by higher contributions from third property financing from enlarged loan book and the recognition of S$13.1m net penalty interest. Also, Property Holding gross profit improved with income contribution from newly acquired hotel assets; namely Hilton Rotterdam Hotel (leased from February 2018) and higher contributions from Crowne Plaza Chengdu Wenjiang and Holiday Inn Express Chengdu Wenjiang Hotspring hotels. This is offset by lower recognition of sale of properties following the timing of handover of completed residential units.
• Revenue from sale of properties fell 75% y-o-y as the Millennium Waterfront project recognised only 145 residential units, 15 commercial units and 279 car parks in 9M18 vs 1,273 residential units, 48 commercial units and 113 car park lots in 9M17.
• 3Q18 net profit grew 16% y-o-y to S$26m led by third property financing mainly from the recognition of net penalty interest and interest from higher disbursement for new third-party in 3Q18 as well as higher contributions from newly acquired hotel assets, which were offset by lower recognition of sale of properties following the timing of handover of completed residential units.

9M18 income from European property portfolio grew 64% y-o-y.

• 9M18 income from European property portfolio grew 64% y-o-y to S$44m mainly from its European hotel income which grew to S$29m vs S$11m in 9M17 following contributions from newly acquired hotel properties, Bilderberg Portfolio, Hilton Rotterdam Hotel and Le Meridien Frankfurt Hotel.
• The Bilderberg portfolio is recording higher occupancy rates with RevPar growing at 8% y-o-y. The Dutch office income fell 4% y-o-y to S$16m largely due to some temporary vacancy at Mondriaan Tower due to the departure of a tenant. This has already been back-filled. This is offset by income contribution from newly acquired Meerparc office in late 2017.

Net debt-to-equity stable at 0.3x.

• Net debt-to-equity remained stable at 0.3x. Management expects gearing to increase as property financing loan book continues to grow given the strong property financing opportunities seen in 3Q18.

Business Review / Outlook

Star of East River Project, Dongguan (SoER) fully sold its residential units and sold 72% of its launched SOHO units in September 2018.

• Star of East River (SoER) project has fully sold six blocks of the residential units. Subsequently, approximately 796 units of SOHO units were launched in September 2018, of which 72% have been sold. The 1,532 remaining SOHO units are expected to be sold progressively. 
• Management is positive on the sales and expects the SOHO blocks to be fully sold very quickly.

Targets to launch the new project in Dongguan (JV with Vanke) by year-end.

• 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).
• By leveraging on its partner Vanke, management believes that the new project can be launched as soon as year-end and remains positive on the strong demand due to residential supply crunch in Dongguan.

Redevelopment of Oliphant expected to complete by 1Q19.

• In the past quarter, the group managed to sign a 10-year lease agreement with Novartis for approximately 4,318 sqm, pushing the pre-committed lease to 60%. We understand rental rates signed are at new record levels in the respective areas. The office buildings are expected to be completed by 1Q19.
• 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. As such, management has widened its geographical network to explore more regions such as Eastern Europe and Australia.

Strong increase in property financing opportunities.

• As highlighted in the previous quarter (2Q18), management saw a huge increase in demand for property financing given the increased credit tightening in China. Its property financing loan book has increased further by 20% q-o-q to RMB1.9bn (S$38m). As such, interest from third-party loans has increased fivefold to S$5m in 3Q18 vs S$1m in 3Q17 and doubled q-o-q. 
• Management expects 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 interest 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 is confident that it would recover the principal amount but at a slightly lower interest rate for Case 1.

Divestment of four hotels from the Bilderberg portfolio, expected to complete by January 2019.

• In October 2018, First Sponsor disposed another four hotels from the Bilderberg portfolio at more than 140% premium to cost. We estimate that total divestment gain to be recognised upon completion at end-December 2018/January 2019 to be approximately S$5m. 
• On the partial divestment of Chengdu Cityspring (including M Hotel) in May, the divestment gain of about S$8m is yet to be recognised in 4Q18 – FY19. This divestment gain is yet to be included 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 fuelled by post-Brexit relocation to Netherlands. 
• In addition, its development projects in Dongguan and Chengdu, China continue to sell well and its 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/RevPAR, and
  4. delivery of strong economic growth.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-11-01

SGX Stock Analyst Report BUY MAINTAIN BUY 1.620 SAME 1.620