Bukit Sembawang Estates - DBS Research 2020-10-23: The Singaporean Dream; Initiate Coverage With BUY

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BUKIT SEMBAWANG ESTATES LTD (SGX:B61)

Bukit Sembawang Estates - The Singaporean Dream; Initiate Coverage With BUY

• Large land bank slated for landed property homes sufficient to last a decade.
• Normalisation of dividends in FY21 to drive yield to c.4%; potential c.70% return on capital as land bank utilised.
• Business model to pivot towards recurring income to boost dividends; debt headroom of S$360m-S$750m for acquisitions, assuming 0.3x-0.6x net debt to equity.
• Initiate coverage on Bukit Sembawang Estates with BUY and target price based on 55% discount to RNAV of S$12.10.

Bukit Sembawang Estates - Company Background

• Bukit Sembawang Estates Limited was incorporated in Singapore in 1967. As a Singapore-focused property developer, Bukit Sembawang Estates (SGX:B61) was listed in 1968 and has completed notable development projects such as Luxus Hills and Skyline Residences.
• More recently, Bukit Sembawang Estates entered Singapore’s serviced apartment space, opening Fraser Residence Orchard in 2019.

Experienced landed property developer with coveted projects.

• Bukit Sembawang Estates has a long track record of developing properties in Singapore, having begun developing landed properties in the 1950s. The group has developed over 4,600 landed homes and over 1,800 residences units in Singapore. It has also garnered multiple awards from organisations such as FIABCI and New York Design Awards in the process.
• As evident from Bukit Sembawang Estates’s development projects, the group is a specialty landed property developer and owns sizable parcels of land that have been steadily developed over the years.

Vast land bank to be unlocked.

• Bukit Sembawang Estates owns an estimated c.235,000 sqm of undeveloped land, with c.93% of it located in the Ang Mo Kio Avenue 5 region. The land has yet to be earmarked for development and is mostly held on a 999-year tenure from 1879 for non-residential rural use. That said, we observe that Bukit Sembawang Estates has been successful in converting parcels of this land for residential use with a shortened 99-year tenure.

Pure play Singapore-focused developer.

• Until recently, Bukit Sembawang Estates was a pure play Singapore property developer focused on luxury residential projects and landed homes. The addition of Fraser Residence Orchard in 2H19 has added a new hospitality segment to the business.
• We can expect income to become more recurring in the future once the hospitality market recovers from COVID-19 and Fraser Residence Orchard ramps up.

Management refresh.

• Of late, we observe that Bukit Sembawang Estates’s management team has undergone significant changes with the retirement of Mr Ng (Chief Executive Officer), Ms Katharine Kum (Head of Projects) and Mr Justin Ho (Head of Property and Maintenance Management).
• Current Bukit Sembawang Estates management team:
  • Acting Chief Executive Officer and Chief Financial Office: Mr Ooi Chee Eng.
  • Head of Project: Mr Mcdonald Low Hoong Chiong.
  • Head of Property Management: Mr Michael Chan Lim Huat.

Bukit Sembawang Estates’ share ownership indicates links to OCBC Bank.

• We note that a significant shareholder of Bukit Sembawang Estates is Selat Pte Ltd (11.4%) which is also a significant shareholder of OCBC Bank (SGX:O39) (12.0%) and has ties to OCBC Bank’s founding Lee family.

Bukit Sembawang's undervalued land bank that can last another decade.

Bukit Sembawang’s undiscounted RNAV stands at S$3.1bn.

• Bukit Sembawang Estates is equipped with a sizable land bank of over c.235,000 sqm slated for coveted landed homes. By applying a conservative 55% discount, we derive a discounted RNAV valuation of S$1.4bn. Our RNAV valuation has accounted for the values of Fraser Residence Orchard and Bukit Sembawang Estates’s development projects (8 St Thomas Walk and NIM collection Phase1&2, Liv@MB, The Atelier and NIM collection Phase3).
• Bukit Sembawang Estates has enough inventory to sell for the next decade, with the land pegged at extremely low historical cost valuation (we estimate an RNAV of S$12.10/share). See the breakdown of Bukit Sembawang Estates' RNAV in PDF report attached below.
• Bukit Sembawang Estates has a history of trading at a lower valuation compared to RNAV. However, we believe that current valuations are unjustifiably low and warrant a relook given the -2SD P/NAV valuation on both a 5-year and 3-year basis.

Mid-cap property developers peer comparison.

• The mid-cap property developers are trading at an average of 0.44x P/NAV. While Bukit Sembawang Estates appears to be trading at a premium to its mid-cap peers, we note that the group is unique given that its balance sheet contains substantial tracts of land (i.e. AMK Ave5) held at low historical costs.

Borrowings have risen but remain the lowest among peers.

• In the past six years, Bukit Sembawang Estates has avoided taking on debt, choosing to reinvest its cash flows instead. This changed in FY19 when Bukit Sembawang Estates decided to borrow to acquire Makeway View and Katong Park Towers. Currently, both sites are being redeveloped into The Atelier and Liv @ MB respectively.
• Given Bukit Sembawang Estates’ strong balance sheet, we think taking on debt may help the company to optimise its capital structure, especially as its EBITDA/Interest Paid ratio remains healthy at 10.2x in FY20.
• Bukit Sembawang Estates’ net debt-to-equity is also the lowest among peers (SingHaiyi (SGX:5H0), Chip Eng Seng (SGX:C29), Tuan Sing (SGX:T24), GSH Corp (SGX:BDX), Hiap Hoe (SGX:5JK), Hong Fok (SGX:H30)) at 0.03x as at end-FY20. Going forward, while Bukit Sembawang Estates will remain prudent, we think the group may be more open to taking on debt to replenish its land bank or for property acquisitions.

Dividend normalisation a catalyst.

• With strong sales across its landed development projects in the past year and a pipeline of new projects, we believe Bukit Sembawang Estates may eventually hike dividends back to the 18-33Scts/share range, implying a “REIT-like” yield of 5- 9%. See Bukit Sembawang Dividend History.
• As Bukit Sembawang Estates’ land bank is utilised, we estimate that long-term investors could receive c.70% of their capital from holding on to Bukit Sembawang Estates for the next decade.

Pivot to recurring income a welcome strategy.

• Bukit Sembawang Estates intends to pivot towards building a recurring income base, starting from Frasers Residence Orchard, which could generate revenues of c.S$11m per annum.
• With an almost net cash balance sheet, Bukit Sembawang Estates can gear up to fund acquisitions. Assuming a target net debt-equity ratio of 0.3x-0.6x, the group has potential firepower of S$360m – S$750m.

Bukit Sembawang - Recommendation & Valuations

• Initiate coverage on Bukit Sembawang Estates with BUY and target price based on 55% discount to RNAV of S$12.10.
• See the 23-page PDF report attached below for investment summary and complete analysis on Bukit Sembawang Estates.
• See also Bukit Sembawang Share Price; Bukit Sembawang Target Price; Bukit Sembawang Analyst Reports; Bukit Sembawang Dividend History; Bukit Sembawang Announcements; Bukit Sembawang Latest News. 

Derek TAN DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-10-23

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