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Chip Eng Seng – DBS Research 2018-11-07: Negatives Priced In

(Source: research.sginvestors.io)

Key Risks to Our View:

Where We Differ:

Upgrade to HOLD as Chip Eng Seng (CES) delivers on Park Colonial; Target Price unchanged at S$0.75.

  • Execution risk,
  • Weaker demand,
  • Competition,
  • Equity fund-raising risk.

WHAT’S NEW – 3Q18 Results Highlights

3Q18 PATMI of S$31.4m above expectations as Chip Eng Seng (CES) delivers on Park Colonial

  • 9M18 PATMI rose 63% y-o-y to S$31.4m from S$19.3m in 9M17 on higher contributions from the property development and hospitality divisions. 
  • The increase was mainly led by higher revenue growth from the property development (revenue +54% y-o-y) and hospitality (revenue +108% y-o-y) segments and maiden contributions from the education sector, which offset lower contributions from construction (-28% y-o-y) and property investments & others (-33% y-o-y).
  • CES recorded 3Q18 PATMI of S$14.3m vs S$13.2m in 3Q17. Similarly, the strong performance in 3Q18 was led by both property development and hospitality.

Property development remained the key earnings driver.

  • Property development recorded strong growth mainly from the progressive recognition of High Park Residences, Grandeur Park Residences and Park Colonial, and the sale of its property at 150 Queen Street in Melbourne.
  • Meanwhile, construction revenue fell mainly due to timing of construction works where older projects in Tampines and Woodlands are nearing completion while Bidadari projects are in their active stages of construction.
  • The group also registered an impairment loss of S$7.5m during the quarter, which was attributed to the construction segment.

Hospitality division was driven by new acquisitions and opening of new hotel.

  • Hospitality division delivered strong growth from newly acquired hotels in Australia, The Sebel Mandurah and Mercure & Ibis styles Grosvenor Hotel, and the opening of the Grand Park Kodhipparu Resort in June 2017.

Property Investments & Others division.

  • Contributions from this segment fell mainly due to absence of contribution from the divestment of 420 St Kilda Road in Melbourne in August 2017.

Outlook

Property Development:

  • In the wake of the property cooling measures, buyer activity has slowed, but incremental sales for CES’s key projects remained healthy with Grandeur Park and Park Colonial being 96.7% and 65.1% sold respectively.
  • Management believes that URA’s revised guidelines on the supply of smaller units will further weigh on market sentiment. While maintaining a cautious stance, the company is currently preparing its Changi Garden site for its 1H19 launch.
  • Tightened credit conditions have also affected CES’s recently launched Fifteen85 project in South Melbourne, which has only sold 4.1% of its first phase. Additionally, 20 apartments from Williamsons Estate, which were completed in 3Q18, remain unsold.

Construction:

  • Total construction orderbook fell to S$440.7m vs S$479.9m in 3Q18, as the group did not secure any significant construction projects during the quarter.

Education:

  • The group expects its first Repton Schoolhouse to commence operations in January 2019. While it will take time for this new venture to break even, given the competitive landscape and the lack of track record in this space, it could help unlock a new recurring income stream for the group over the medium term.

Our Thoughts and Recommendation

Upgrade to HOLD; S$0.75 Target Price.

  • FY18F/19F estimates tweaked as sales-to-date for Park Colonial has tracked ahead of our initial expectations to 65.1% currently.
  • While the stock lacks immediate catalysts, we believe that at current prices – c.-1SD (or 0.55x) of its historical P/NAV range, the negatives are largely priced in. Upgrade to HOLD with SOTP-based Target Price of S$0.75 unchanged.
  • Meanwhile, an attractive prospective yield of c.5.8% is on offer.

More Info: research.sginvestors.io

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