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

PERENNIAL REAL ESTATE HLDGSLTD (SGX:40S)

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.

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.

Unlocking value from strategically located land bank with partial exposure to healthcare. We are one of two brokers that cover Perennial Real Estate Holdings. See Perennial Real Estate Holdings Analyst Reports.
Perennial Real Estate Holdings’s hidden gems are its vast integrated projects in strategic locations across the main transportation hubs in China though these have lengthy gestation periods. Apart from property, Perennial Real Estate Holdings has built a portfolio of medical and healthcare services to leverage on rising healthcare demand in China and Singapore.

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

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.

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.

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.

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