First Sponsor Group - DBS Research 2019-07-26: Steady Growth Momentum


First Sponsor Group - Steady Growth Momentum

  • First Sponsor Group's 1H19 net profit rose 33% y-o-y from handover of commercial units and contributions from new investment properties.
  • New land bank in China to be launched late FY19/early FY20.
  • Keen to expand in Australia via property financing.
  • Declared interim dividend of 1.1 Scts, up 10% y-o-y.

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.

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 Group, 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 Group currently owns 24 properties/projects in the Netherlands (mainly in Amsterdam) and two hotels in Germany and one in Milan, Italy.

Potential Catalysts:

  • Sales and completion of development properties, rising rental rates/RevPAR, and delivery of strong earnings growth.

WHAT’S NEW - Steady growth momentum

1H19 led by contributions from handover of completed units in China and contributions from new investment properties.

  • First Sponsor Group's 1H19 net profit grew 33% y-o-y to S$39m, 27% of our FY19 estimates, mainly from revenue recognition from the handover of 100 commercial units (vs 62 residential and three commercial units in 1H18) for the Millennium Waterfront project and higher contributions from investment properties largely from newly acquired Westin Bellevue Dresden Hotel.
  • The net profit growth was partially offset by lower contribution from property financing segment (revenue fell 1% y-o-y) due to the absence of one-off penalty interest income of S$12.7m recognised in 1H18.
  • 2Q19 net profit grew 25% y-o-y to S$15m mainly led by higher contributions from both property development and investment properties, offset by lower contributions from property financing due to lower average loan book in 2Q19.
  • First Sponsor Group declared an interim dividend of 1.1 Scts vs 1.0 Scts per share in 2Q18.

1H19 income from European property portfolio fell 4% y-o-y due to one-off agent fees and softer Dutch hospitality market; mitigated by new office and hotel.

  • First Sponsor Group's 1H19 income from European property portfolio fell 4% y-o-y to S$27m, impacted by both its hotel (-4% y-o-y) and office (-3% y-o-y) portfolios. The lower income from its hotel portfolio were due to the divestment of five hotels in the Bilderberg hotel and the softening of the Dutch hospitality market (VAT rate increased to 9% from 6% for both hotel rooms and F&B since 1 January 2019), offset by contributions from newly acquired Westin Bellevue Dresden Hotel.
  • Office portfolio recorded lower income due to one-off agent fees incurred for the leasing of Oliphant Amsterdam, offset by income contribution from Munthof Amsterdam (redevelopment completed in January 2019) and higher occupancy at Mondriaan Tower Amsterdam.

Third-party China property financing loan book almost doubled y-o-y; interest income more than quadrupled.

  • Interest income from third-party China property financing grew 22% y-o-y. Non-penalty interest income was S$20.2m in 1H19 vs S$3.7m in 1H18. The strong performance was led an average loan book increase of 86% vs 1H18. On a q-o-q basis, 2Q19 interest from third-party China loans fell 20%, in line with the average loan book decrease of 33% q-o-q.
  • Although average loan book fell to RMB1.9bn in 2Q19, we note that the loan book had picked up by the end of the quarter and stood at RMB2bn as at June 2019.

Net debt-to-equity increased marginally to 0.5x.

  • Net debt-to-equity increased marginally to 0.5x from 0.4x as at December 2018, following disbursement for property financing and acquisition of land bank and investment properties.

Business review/outlook

Sales momentum at Star of East River Project, Dongguan (SoER) continues.

  • Sales momentum of SOHO units continued with 75.9% of 1,600 units launched sold vs 62.7% of 1,500 units launched sold as at March 2019 vs 54.2% in 4Q18.
  • Sales of its office units increased to 53.6% in 2Q19 vs 42.3% in 1Q19.

Latest launch Emerald of the Orient sold 95% within the first week.

  • One of six blocks of residential units was launched in June 2019 and 95% of the units were sold within the first week of launch. Expects to launch the remaining five blocks in the next few months.

Plans to launch loft SOHO units of Chengdu Millennium Waterfront in 3Q19.

  • Plot F comprises 807 loft SOHO units and is expected to be launched in 3Q19.

New land bank in China – The Pinnacle expected to be launched in late 2019/early 2020 and three new land banks via JV.

  • First Sponsor Group has unveiled its new project, The Pinnacle, a new land site at Chang’an, Dongguan which was acquired in March 2019. The Pinnacle comprises 607 residential apartments, 226 SOHO units and 3,000 sqm of retail space. The group expects to launch its residential units in late 2019/early 2020.
  • With the run-down of land bank and unsold inventory in Dongguan, the group entered into a new JV (27% stake) with China Poly Group in June 2019 to develop three adjacent plots of mixed-use development land in the southeast of Wanjiang district in Dongguan, within the vicinity of the group’s Star of East River project. The total GFA of 214,700 sqm comprises 134,000 sqm (62%) of residential and 80,700 sqm (38%) of commercial. The group has pumped in a total of RMB834.7m via capital injection and shareholders’ loan.
  • The price implies a land cost of RMB14,400 psqm. As a comparison, the group acquired the land site in Chang’an, Dongguan in March 2019 for RMB9,600 psqm. Given the familiarity of the group in Dongguan and the robust sales momentum experienced from its existing projects, management remains optimistic on the outlook of properties in Dongguan riding on the potential of the Greater Bay Area.

Oliphant, Amsterdam has achieved 98% lease with WALT of 10.3 years.

  • The redeveloped Oliphant achieved 98% committed lease (93% signed lease agreements and 5% signed letter of intent) with a WALT of 10.3 years. Rental income is expected to contribute to earnings from 2H19 onwards.

Refurbishments and redevelopment potential of its office and hotel portfolio.

  • First Sponsor Group has acquired the remaining sub-apartment rights of the strata-titled mixed-used freehold Meerparc property in Amsterdam CBD and is now well positioned to capitalise on any development opportunity.
  • For its European hotel portfolio, development works on Hampton by Hilton hotel in Utrecht has completed and commenced operations on 17 June 2019. Development works for the 142- room Crowne Plaza hotel are expected to complete in late 2019/early 2020 while its newly Westin Bellevue Dresden Hotel has commenced its first phase of refurbishments (total capex estimated is > EUR12m).

Potential sale of Oliphant and two Utrecht hotels to realise its development profit.

  • Management is considering the sale of Oliphant Amsterdam and two Utrecht hotels (142-room Crowne Plaza and 193-room Hampton by Hilton hotels) to its associated company, FSMC to partially realise capital gains/development profits. There will be no changes to the economic benefit contributions.

Expanding into Australia via property financing.

  • Following its first investment into Australia via a 50:50 JV with Tai Tak (one of its founders and shareholders) with the disbursement of AU$50m loan on a property in Melbourne at end-2018, the group is now keen to increase its exposure to the property market in key cities in Australia. As this is a new market and given the tightening of property policies, the group will look to invest via property financing including hybrid forms with an option for equity participation.

China third-party loan book was maintained at RMB2bn as at June 2019 despite repayment of RMB1.1bn.

  • In March/April 2019, RMB1.1bn of its China loan book was repaid, bringing down its average China third-party loan book from RMB2.8bn in 1Q19 to RMB1.9bn in 2Q19. Despite the easing of credit in China, management managed to maintain its loan book at RMB2bn as at end-June 2019. Management remains optimistic on this segment in 2H19 despite some slowdown.

Maintain BUY rating; Target Price of S$1.62.

  • We maintain our BUY rating and Target Price of S$1.62.
  • First Sponsor Group 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. It 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
    • new acquisitions of attractive and accretive investment properties in Europe,
    • strong sales and completion of development properties,
    • rising rental rates/RevPAR, and
    • delivery of strong economic growth.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-07-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.620 SAME 1.620