Perennial Real Estate Holdings - DBS Research 2019-04-23: Cashing In On Chinatown Point


Perennial Real Estate Holdings - Cashing In On Chinatown Point

What’s New

  • Perennial Real Estate Holdings (SGX:40S), together with its consortium of investors, announced the proposed sale of Chinatown Point (retail podium and four office units) for S$225m which is based on the agreed property price of S$520m (on a 100% basis). The buyers of the mall is Pan Asia Realty Advisors (Singapore), a JV between Mitsubishi Estate Co. Ltd and CLSA.
  • The agreed price translates into a S$2,450 psf on NLA of Chinatown Point Mall. The agreed property price is 9.0% higher than the last valuation of S$477m as of 31 December 2018. The transaction is expected to be completed in June 2019.
  • Perennial Real Estate Holdings’s wholly-owned subsidiary, Perennial (Singapore) Retail Management Pte Ltd will continue in its role as the property manager of Chinatown Point Mall.

Our View

An eye for value; buy, remake, resell!

  • Perennial Real Estate Holdings has once again demonstrated the ability to buy and sell at good values coupled with ability to “value-add” ailing real estate in Singapore, as shown from the sale of Chinatown Point.
  • Chinatown Point was acquired by a Perennial-led consortium back in July 2010 for S$250m. Including a total makeover of the mall costing c.S$91m, the total consideration invested in the property is estimated to be close to S$341m (before interest). The average rent is estimated to have increased to S$13-15 psf from the S$10 psf while NLA has increased 18% over its ownership post the completion of the AEI.
  • Over the years, Perennial Real Estate Holdings has also increased its stake in Chinatown Point by buying out other investors in the initial consortium group. The last two purchases by Perennial Real Estate Holdings was back in November 2016 and November 2017, when the group paid S$61.8m (agreed property value of S$2,077 psf NLA) for a 40% stake and S$8.48m (agreed property value of S$2,080psf NLA) for a 5.3% stake to end up with a final stake of 50.64%.
  • We note that the agreed property price is c.18% higher than the acquisition price of the last two transactions above.

“Keeping the faith” in Perennial Real Estate Holdings as the group reaps attractive returns for its assets.

  • We estimate that the exit price implies an exit yield of c.4.3-4.5%, which is probably still fairly “decent” in today’s environment where strong demand for income-producing assets in Singapore has brought commercial yields down to the 3-4% yield level. However, we do note that the property has 60 years left on its land tenure, which means that the sale price on an implied “freehold” basis is close to S$3,000 psf, which is fairly high.
  • Perennial Real Estate Holdings is expected to receive net proceeds of S$125.3m and a divestment gain of S$17.2m, subject to final adjustments. This is expected to improve the group’s balance sheet and financials in 2019 (especially in turning around an expected 1Q19 net loss 1Q19 as guided by the company previously). Assuming a 45% gearing on the original acquisition back in 2010, the consortium would make 2.4x its equity invested from this divestment, higher if there is more gearing to fund the acquisition.

Maintain BUY; Target Price of S$0.83.

  • We maintain our BUY rating and Target Price of S$0.83 on a 55% discount to RNAV of S$1.85.
  • We continue to expect near-term earnings to be driven by divestment/fair value gains. Potential assets to be divested include AXA Tower (with additional GFA from higher plot ratio in the URA 2019 draft Masterplan) and Beijing Tongzhou.
  • We remain positive on its medium-to-long-term development plans especially as its investments in China (and its healthcare hub) slowly come to fruition despite potential near-term financial risks. We believe the strength of its stakeholders (79% owned by its four key sponsors including WILMAR INTERNATIONAL LIMITED (SGX:F34)’s Mr Kuok, OSIM’s Mr Ron Sim and CEO Mr Pua, and partners and key management team) plays an integral role to execute and mitigate potential financial risks.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-04-23
SGX Stock Analyst Report BUY MAINTAIN BUY 0.830 SAME 0.830