FIRST SPONSOR GROUP LIMITED (SGX:ADN)
First Sponsor Group - Large Pipeline Of Sales; Record Pretax Profit Excepted For FY21
- First Sponsor Group (SGX:ADN)'s FY20 net profit 28% below forecast due to lower share of after-tax profits from associates and JVs as well as lack of other gains.
- ASPs for Dongguan projects exceeded estimates by 10-30%. Unrecognised Dongguan sales rose from S$599mn to S$935mn. Gross development value (GDV) for unlocking surged from S$1.9bn to S$4.1bn, with the addition of new Fenggang and Panyu projects.
- Record FY21 pretax profit expected for First Sponsor Group from revenue backlog.
- Maintain BUY with unchanged SOTP-based target price of S$1.56.
The Positives
Record FY21 pretax profit expected
- First Sponsor Group only recognised profits from four commercial units and 3,997 carpark lots in FY20, which resulted in a 64% dip in revenue from property sales (FY19: 867 residential units, 122 commercial units and 199 carpark lots). This implies that the bulk of sales from the Star of East River and Emerald of the Orient would be recognised in FY21. We estimate a total GDV of S$363mn from these projects.
- In addition, unrecognised revenue from the Pinnacle and Plot F of Millennium Waterfront was S$372mn. This should be recognised progressively over the next two years.
- See First Sponsor Group's announcements.
The Negatives
FY20 net profit 28% below expectations.
- First Sponsor Group's gross profit was in line at 95% of forecast despite a 36% y-o-y dip in revenue. This was thanks to better margins from the sale of carpark lots at Millennium Waterfront, which were carried at zero cost. However, net profit was down 39% y-o-y and 28% below expectations, due to a S$12.3mn loss from associates and JVs vs a S$71.2mn gain in FY19.
- There was also a lack of other gains from the disposal of Oliphant a year ago. Adjusted for Oliphant office sale, FX gains and non-cash adjustments, First Sponsor Group's net profit declined 14.8% y-o-y.
RMB330mn loan in default.
- A borrower group with two cross-collateralised loans amounting to RMB330mn has been in arrears in a month’s worth of interest payments since March 2020. In November 2020, First Sponsor Group commenced legal action to recover its outstanding loan principal and interest. The loans have been secured on a residential villa and a 5-floor retail mall in Shanghai with a combined LTV of 53.4%.
- In view of First Sponsor Group’s ongoing discussions with the borrower and positive outcomes in two defaulted loans previously, First Sponsor Group is optimistic about recovery. No provision was made for its outstanding loan principal in 4Q20.
Outlook
Dongguan property maket remains robust.
- 2020 home prices in Dongguan rose the most in China, by 29%. Shenzhen came in second with a 23% increase. Dongguan’s ambition to move up the value chain to become a hi-tech manufacturing base has drawn thousands of workers to the city, fuelling demand for property. First Sponsor Group’s The Pinnacle’s inventory was wiped out in one day at the maximum allowed selling price. At Skyline Garden’s launch, all 830 units were sold on their first day of launch in December 2020. First Sponsor Group’s sales office had to cut off the queue due to overwhelming demand. People resorted to trading queue numbers at RMB200 per number.
- Most of First Sponsor Group’s projects have been derisked. They are either awaiting handover or being kept for minimum holding periods as stipulated in land tenders. Its remaining projects are a last residential block at Skyline Garden and the Humen TOD project. In October 2020, First Sponsor Group was approached by an independent third party for a potential sale of Plot E of the Chengdu Millennium Waterfront project. Discussions are ongoing. To capitalise on the positive outlook of the Greater Bay Area, First Sponsor Group has taken on its new Fenggang and Panyu projects.
- In January 2021, First Sponsor Group took an 18% stake in a project in Fenggang, Dongguan as well as gave an interest-free secured property financing loan of RMB500mn for this project. The land can be redeveloped into a residential project with saleable GFA of 162,300 sqm.
- In February 2021, First Sponsor Group agreed to acquire a largely residential development company in Panyu, Guangzhou. This company developed Phases 1 and 2 of the Le Papillon project in Guangzhou which have been substantially sold. Construction of the last phase of the project has been put on hold. Phase 3 has a saleable GFA of 162,959 sqm. Effective land consideration is RMB1,460mn. Presales are expected in 4Q21.
- Construction work has begun for the first sector of its Humen transit-oriented development (TOD) project. Phase 1 will comprise four SOHO blocks, 13 residential blocks and 3,730 saleable underground carpark lots. They constitute 510k sqm of the 1mn sqm GFA project. Sub-divided into two phases, Phase 1.1 will comprise 162k sqm of residential GFA, 57.7k sqm of SOHO GFA and 11.8k sqm of commercial and ancillary GFA. We are expecting completion of Phase 1.1 to rake in S$230mn of GDV upon handover in 2022/2023, assuming presales of two SOHO blocks and six residential blocks from 2H21.
- Total development sales from Dongguan projects yet to be recognised rose from S$599mn to S$935mn. GDV for unlocking increased from S$1.9bn to S$4.1bn, as ASPs are 10-30% above estimates. The increase also reflects new projects in the pipeline.
European hotels likely to remain weak.
- Due to COVID-19’s resurgence and a drop in demand after summer holidays, occupancy at First Sponsor Group’s operating hotels dived q-o-q. FY20 EBITDA loss of €1.1mn included an estimated €8.4mn in government wage subsidies. Subsidies are expected to continue till 1H21. Should they cease, First Sponsor Group’s hotel performance may be further dented.
- FY20 valuation of First Sponsor Group's European hotels fell by 3-6%, but a strong office performance and €/S$ appreciation helped to cushion the impact on the portfolio.
Property finance remains a solid anchor.
- First Sponsor Group's FY20 property financing revenue grew 20% y-o-y. China continues to tighten credit to stabilise the nation’s rising debt levels. We believe that First Sponsor Group will benefit from growing requests for alternative funding sources, amid lower fiscal spending and tighter controls on property developers.
- In December 2020, First Sponsor Group disbursed a RMB900mn secured loan for a developmentin Tangxia, Dongguan. First Sponsor Group will seek to grow its PRC loan portfolio prudently.
- In Europe, despite difficult operating conditions, its 33%-owned FSMC group, which owns 95% of the Dutch Bilderberg hotel portfolio, was able to service interest on a loan from the group fully in FY20. However, FSMC may exercise its right to defer interest payments in FY21 if hospitality trading remains weak due to a second lockdown in Europe and the traditionally weak winter season.
Maintain BUY and target price of S$1.56 for First Sponsor Group
- According to a 2020 JLL hotel investors’ sentiment survey, 1H20 global hotel transaction volume fell 51% y-o-y. Active investors shrank 40% as they moderated their appetite for hotel acquisitions. We have marked down our hotel valuations by 35% due to continued weakness in hotels.
- We also recategorised some investment properties as other investments. On the back of First Sponsor Group’s upcoming property developments as well as its well-supported outlook, we decrease our SOTP-discount from 30% to 20%.
- See
- First Sponsor's share price has been hovering around its 5-year P/B average of 0.7x. Our target price of S$1.56 implies 0.75x FY21e P/B, not demanding.
Tan Jie Hui
Phillip Securities Research
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https://www.stocksbnb.com/
2021-02-18
SGX Stock
Analyst Report
1.560
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