Tuan Sing Holdings - DBS Research 2020-09-15: Making A Case

TUAN SING HOLDINGS LIMITED (SGX:T24)

Tuan Sing Holdings - Making A Case

Office fundamentals favourable for completion of Robinson Point sale.
Gultech to extend hot streak and ride semiconductor upcycle.
Resilient Singapore property market a plus for potential launch of Peak Residence.
COVID-19 impact likely priced in; reiterate BUY on Tuan Sing.

We reiterate our BUY recommendation on Tuan Sing (SGX:T24) as we think the stock remains undervalued at its current P/NAV of 0.3x (between -1SD and -2SD from 3-year mean).
While we have revised FY20F earnings slightly by -3% due to the lockdown affecting the Australian hotel business, we think the share price may have yet to fully price in the completion of the Robinson Point sale and may appreciate further once the deal is confirmed.
In the meantime, GulTech looks set to continue riding the semiconductor upcycle while a recovery in the Australian hospitality business may be on the cards as COVID-19 subsides.

While worries over the attractiveness of office properties and in turn cast doubts over the completion of the deal arising from pandemic-led work-from-home trends. We think a case can still be made for the deal.
We note that the structure of the deal (1% initial deposit and due diligence conducted before sale and purchase agreement) is similar to the 2016 sale of the Straits Trading Building.
In addition, while Robinson Point is being sold at a significant 70% premium to AXA Tower on a per NLA basis, the former is a freehold property compared to the 61-year leasehold period of the latter. A fairer comparison could be with Straits Trading Building where the premium is a lower 5.6%.

New space in the office market is expected to remain low over the next few years with 2Q20 pipeline supply of office space at 708,000 sqm. Indeed, the previous time pipeline supply was at or below this level was in 3Q06 at 692,000 sqm. While demand for office space may have tapered off temporarily due to the pandemic, it is worth noting that the current office environment is still better than in 3Q17 when vacancy rates hit 13.3% and pipeline supply stood at 1,054,000 sqm.
While we acknowledge that work-from-home trends may bring about structural changes in the office market, we believe a lack of supply could help mitigate any impact. Work-from-home is not without its fair share of issues. Some matters that have been discussed include a weakening in company culture and difficulty in onboarding of new hires. As such, while work-from-home trends could lead to a reduction in space needed, we think companies will prefer to retain some space and utilise it more efficiently (e.g. through conversion to hot desking).

We observe that a high net debt-to-equity and low interest coverage ratio may have dragged on Tuan Sing’s valuations. With most of the proceeds from the sale being used to repay borrowings, we estimate that net debt-to-equity could improve to 0.90 from 1H20’s 1.37, with NAV uplifted to S$1,252.7m (vs S$1,129.5m in 1H20). As such, an improved interest coverage ratio and net debt-to-equity could catalyse Tuan Sing's P/BV to re-rate closer to peers’ mean P/BV of 0.46x.
See Tuan Sing Share Price; Tuan Sing Target Price; Tuan Sing Analyst Reports; Tuan Sing Dividend History; Tuan Sing Announcements; Tuan Sing Latest News.

Singapore Research Team DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-09-15

SGX Stock Analyst Report BUY MAINTAIN BUY 0.440 SAME 0.440