First Sponsor Group - DBS Research 2019-02-21: Nowhere To Go But UP

SGinvestors.io

FIRST SPONSOR GROUP LIMITED (SGX:ADN)

First Sponsor Group - Nowhere To Go But UP

• First Sponsor’s FY18 net profit up 28% y-o-y, above expectations, led by newly acquired hotels and higher interest income from third-party China property financing. 
• Third-party China loan book more than doubled y-o-y. 
• Declared final dividend of 1.3 Scts (1.2 Scts in 4Q17). Total FY18 dividend of 2.3 Scts vs 2.2 Scts in FY17. 
• Proposed issuance of second rights issue of PCCS2 to raise up to S$399m. 

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 GROUP LIMITED (SGX:ADN) is one of the rare property developers listed in Singapore that will benefit from higher demand fuelled by post-Brexit relocation to the Netherlands.
• Our Target Price of S$1.62, which offers potential upside of 28%, 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 57%. 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 there.
• 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.

FY18 net profit up 28% y-o-y from property financing and newly acquired hotels.

• FY18 net profit grew 28% y-o-y to S$113m, above our estimates, led by newly acquired hotels and higher contributions from property financing (loan book quadrupled from FY17).
• FY18 income from European property portfolio rose 70% y-o-y from newly acquired hotel and office assets.
• Key highlights:
  1. issuance of second rights issue of PCCS2,
  2. two new office blocks in Europe to contribute in FY19,
  3. positive outlook on third-party PRC property financing.

WHAT’S NEW - Nowhere to go but UP

Strong FY18 net profit, led by contributions from newly acquired hotel assets and higher contributions from property financing segment.

• First Sponsor’s FY18 net profit grew 28% y-o-y to S$113m, above our estimates, mainly from full-year contributions from newly acquired investment properties including the Hilton Rotterdam Hotel which was acquired in February 2018 and higher revenue contribution from property financing (+72%) from higher disbursement of loans largely in 4Q18. The net profit growth was partially offset by lower contribution from property development segment with lower settlement of residential properties recognised from the Millennium Waterfront Project.
• First Sponsor’s gross profit improved 6% y-o-y despite FY18 revenue falling 28% y-o-y mainly led by higher contributions from property financing segment and hotel operations in Europe (partially from newly acquired hotel assets including Hilton Rotterdam Hotel). This was offset by lower recognition of sale of properties following the timing of handover of completed residential units.
• Revenue from sale of properties fell 55% y-o-y as the Millennium Waterfront project recognised only 647 residential units, 71 commercial units and 976 car parks in FY18 vs 2,353 residential units, 93 commercial units and 213 car park lots in FY17.
• First Sponsor’s 4Q18 net profit grew 37% y-o-y to S$58m led by a full-quarter contribution from newly acquired investment properties including Hilton Rotterdam Hotel, Le Meridien Frankfurt and Meerparc Office, better performance from its investment properties (especially the European properties), and higher net fair value gains in 4Q18 vs net impairment losses in 4Q17 (mainly related to development projects in Chengdu).

Declared a final dividend of 1.3 Scts vs 1.2 Scts per share in 4Q17.

• Total dividend for FY2018 increased to 2.3 Scts vs 2.2 Scts per share in FY17.

FY18 income from European property portfolio grew 70% y-o-y.

• First Sponsor’s FY18 income from European property portfolio grew 70% y-o-y to S$60m mainly from its European hotel income which grew to S$40m vs S$16m in FY17 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 6% y-o-y. The Dutch office income grew 3% y-o-y to S$20m largely from newly acquired Meerpac office in late 2017 and rental income from Mondriaan Tower following the temporary vacancy highlighted in 3Q18 which has been back-filled.

Third-party People’s Republic of China (PRC) property financing loan book more than doubled y-o-y; interest income more than quadrupled.

• Interest income from third-party PRC property financing fell 6% y-o-y mainly due to lower penalty interest (-51% y-o-y) in FY18. However, non-penalty interest income more than quadrupled from the loan book that more than doubled y-o-y.
• In 4Q18, First Sponsor added another RMB0.9bn to its loan book (+44% q-o-q to RMB2.8bn), which the full contribution from the increased interest income will be recognised in FY19.

Net debt-to-equity increased marginally to 0.4x.

• Net debt-to-equity increased marginally to 0.4x from 0.3x as at December 2017, as expected by management in the previous quarter as property financing loan book continued to grow given the strong property financing opportunities seen in 3Q18.

Business Review/ Outlook

Star of East River Project, Dongguan (SoER) commences handover of fully sold residential blocks from January 2019.

• Management expects to commence the first handover of two residential blocks in January 2019, out of six residential blocks which are already fully sold. Subsequently, another 732 units (total 1,528 units) of SOHO units were launched in 4Q18, of which 54% have been sold (sold 256 units in 4Q18).
• Management remains positive on the sale as supply crunch remains in Dongguan.

First phase of Emerald of the Orient which was launched in December 2018, is 61% sold.

• The first phase of Emerald of the Orient comprising 91 units of villas was launched in December 2018 and has achieved a sales take-up of 61.3%.
• This project was launched six months after First Sponsor and partner Vanke won the land bid. The high-rise residential blocks are expected to be launched progressively from mid- 2019.

Munthof and Oliphant will start to contribute in FY19.

• The Munthof property which is fully leased to a utility supplier in the Netherlands for eight years, has been completed. The redevelopment of Oliphant (two-thirds of pre-committed lease) is expected to complete in 1Q19. We expect both properties to start contributing rental income in FY19.
• 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, the company remains disciplined in its bids. As such, management has widened its geographical network to explore more regions such as Eastern Europe and Australia.

Acquired a six-storey hotel in Milan, Italy for EUR9.3m (S$14.4m).

• The property was formerly a 65-room four-star hotel named “Grand Hotel Puccini” but is currently vacant.
• There is an ongoing litigation brought by a former tenant of the property against the seller. Under the S&P Agreement, the seller is obliged to continue with the litigation and has undertaken to transfer to First Sponsor the entire price actually paid by the ex-tenant for the purchase of the property in the event of loss in the litigation. In addition, an insurance policy has been taken to cover, the acquisition costs in the event the ex-tenant succeeds in the litigation.
• We believe First Sponsor is taking the opportunity to acquire a distressed asset with a small investment. While there may be uncertainties surrounding this acquisition, it is interesting to note that First Sponsor is expanding its footprints in Europe to Italy and the hotel segment after its acquisition of a portfolio of hotels including the Bilderberg Portfolio, Hilton Rotterdam and Le Meridien Frankfurt. One of its sister companies, CDL HOSPITALITY TRUSTS (SGX:J85) is also expanding into Italy.

Strong increase in property financing opportunities.

• As seen in the strong growth in the 4Q18 loan book, management saw a huge increase in demand for property financing given the increased credit tightening in China. Management remains positive on this segment and continues to expect the loan book to grow in FY19. The company continues to believe that this opportunity is rare as it is seeing increasing interest from strong borrowers with good, unique and prime location properties in China.
• On the default loan cases, First Sponsor has recovered all the loans and penalty interest in Case 2 and is hopeful that Case 1 will close in 2019. Management is confident that it would recover the principal amount but with limited penalty interest.

Issuance of second rights issue of perpetual convertible capital securities at conversion price of S$1.30 (PCCS 2) which comes with a free warrant and bonus warrant to raise up to S$399m.

• First Sponsor announced its undertaking of a renounceable rights issue of:
  1. 3.98% PCCS2 on a 1-to-7 basis,
  2. One free warrant carrying the right to subscribe for PCCS2 during an exercise period of five years from its date of issue on one free warrant for one PCCS2. This could raise up to S$295.8m assuming full take-up (including all outstanding PCCS1 holders convert to shares and participate in this second rights issue.
• In addition, a bonus warrant will be issued for every 10 shares held with the right to subscribe for 1 PCCS2 on the same terms as the free warrants. This could raise up to S$103.5m. The entire exercise could raise up to S$399m, assuming full take-up and conversion.
• The proceeds have been earmarked for the following purposed:
  1. 75% to fund property development projects and/or acquisition of properties (including hotels) held for income, and/or its property financing business,
  2. 10% for general working capital purposes, and
  3. 15% to redeem all outstanding PCCS1 after completion of this exercise.
• The proposed exercise will be undertaken pursuant to the share issue mandate approved by the shareholders of the company at the AGM to be held on 24 April 2018.
• Our ballpark estimation is that the RNAV per share will fall to S$2.16 (currently S$2.49) on a full-dilution basis. We have yet to incorporate this equity fund-raising exercise, pending its completion. Refer to the attached PDF report for RNAV breakdown.
• The exercise price being just marginally above its current share price and the participation of major shareholders indicate the confidence of First Sponsor’s major shareholders on its growth and potential.

In talks for a potential acquisition of a hospitality asset in Germany for c.EUR50m (S$76.7m).

• In conjunction with the announcement of the second rights issue of PCCS2, First Sponsor’s has disclosed that the group is currently in negotiations with several parties to acquire a hospitality asset in Germany via a share deal for an expected c.EUR50m (S$76.7m). However, management expects to face intense competition for this asset, in line with the strong demand and competitive environment seen especially for assets in Germany.

Maintain BUY rating; Target Price of S$1.62.

• We maintain our BUY rating and Target Price of S$1.62. We reduced our FY19F earnings by 15% and increased FY20F earnings by 4% to adjust for the lower cash position in FY19F and higher revenue from property financing segment following the increase in property financing loan book in 4Q18.
• 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, the company's development projects in Dongguan and Chengdu, China continue to sell well.
• First Sponsor 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, which was evident in 4Q18.
• Key catalysts include
  1. new acquisitions 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 economic growth.

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.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-02-21

SGX Stock Analyst Report BUY MAINTAIN BUY 1.620 SAME 1.620