Perennial Real Estate Holdings - DBS Research 2019-05-10: Look Forward To Divestment Gains


Perennial Real Estate Holdings - Look Forward To Divestment Gains

  • Perennial Real Estate Holdings's 1Q19 recorded losses as pre-warned; expect earnings turnaround with divestment gains in 2Q19.
  • AXA Tower to benefit from higher plot ratio.
  • The Capitol achieved total occupancy of > 90%.
  • Maintain BUY and S$0.83 Target Price.

Trading at 0.4x P/BV; maintain BUY.

  • We maintain our BUY rating on PERENNIAL REAL ESTATE HOLDINGS (SGX:40S) with a Target Price of S$0.83 based on 55% discount to our RNAV. The stock currently trades at 0.4x P/BV, offering massive upside as it gradually realises its RNAV potential.

Where We Differ:

Potential Catalysts:

  • Strata/en-bloc sales, divestment of assets, building recurring income through healthcare hub and business.

Look forward to divestment gains in 2Q19

1Q19 recorded losses as pre-warned; expect earnings to turnaround with divestment gains in 2Q19.

  • As previously warned, Perennial Real Estate Holdings’s 1Q19 recorded a loss of S$27m vs 1Q18’s net profit of S$5m, mainly due to absence of a one-off gain recognised under share of results of associates arising from the UNITED ENGINEERS LTD ORD (SGX:U04) transaction (acquisition of an additional 20% stake in WBL), and higher administrative expenses (+59% y-o-y) and interest expense (+77% y-o-y) following the start-up costs for Perennial International Health and Medical Hub, Chengdu (PIHMH) and The Capitol Kempinski Hotel Singapore.
  • Perennial Real Estate Holdings' 1Q19 EBIT (ex-gains) grew 43.6% y-o-y mainly due to higher contribution from management business (PIHMH and The Capitol).
  • As announced in Apr19, the divestment gain of S$17m from the disposal of its 50.64% stake in Chinatown Point Mall is expected to be recognised in 2Q19, which will support its 2Q19 and FY19 results.
  • In Mar19, Perennial Real Estate Holdings redeemed its S$125m MTN from the issuance of S$625m fixed rate notes under the S$2b multicurrency debt issuance programme established in Jan15. There is a remainder of S$400m outstanding from the program.
  • The debt expiring in FY19 is mainly the S$611m Singapore loan, of which S$119m has been refinanced and S$365m is in the process to be refinanced. The remaining loans are due in 4Q19.
  • The debts expiring in 2020 to 2021 are S$914m and S$1,037m respectively, of which there is another tranche of retail bonds amounting to S$280m expiring in 2020.

Updates on major projects:

  • TripleOne strata-sale continues. More than 10 units at TripleOne Somerset have been sold to-date at between S$2,586 and S$2,890 psf. Total YTD gross strata sales amounted to S$28.3m.
  • AXA Tower could potentially have another 500k sqft (+46.5%) of GFA. AXA Tower is one of the developments that will enjoy an uplift in gross plot ratio. This will result in additional GFA of 500k sqft, +46.5% from the current 1.05m sqft. Despite exploring potential en-bloc opportunities, management says they will actively pursue this redevelopment incentive by the government.
  • Divestment of 50.64% stake in Chinatown Point. The divestment of its 50.64% stake in Chinatown Point was announced in Apr19 and Perennial Real Estate Holdings expects to recognised a gain of S$17.2m in 2Q19.
  • The Capitol achieved total occupancy of 84%, to increase to > 90% by 3Q19. Since its opening, The Capitol has slowly gained traction and achieved total occupancy of 84%, and is expected to increase to >90% by 3Q19. New tenants secured in 1Q19 include Burger King, Spicy Rock, Kei Style Sushi, and Eccellente.
  • PIHMH’s committed occupancy inched up to 92.8% from 91% in FY18. Gleneagles Chengdu Hospital has commenced fitting-out works and is expected to commence operations in 2H2019.

Maintain BUY and S$0.83 Target Price.

  • We maintain our BUY rating and Target Price of S$0.83 based 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.
  • 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 4 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 potential financial risks.

Key Risks to Our View:

  • Negative changes to property rules in China and exposure to RMB currency fluctuations as Perennial Real Estate Holdings owns a large land bank in China. Further deterioration in operating cashflows, coupled with high interest cost, may impact interest cover.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-05-10
SGX Stock Analyst Report BUY MAINTAIN BUY 0.830 SAME 0.830