Chip Eng Seng expected to benefit from market rebound

By Trinity Chua

/ The Edge Singapore |

October 9, 2017 4:30 PM SGT

Home prices rose 0.5% in the third quarter of this year, the first rebound in four years, according to flash data released by URA on Oct 2.

The private residential property index rose 0.7 points from 2Q to hit 137.3 points.

OCBC Investment Research says this is “a key inflection point marking the end of the Singapore housing bear” and that home prices hit their cyclical lows in mid-June. The brokerage expects home prices to appreciate 3% to 8% next year, buoyed by a healthier rental market and better macroeconomic conditions.

As the residential market makes a comeback, we are adding residential property developer Chip Eng Seng Corp to our portfolio. We are purchasing 12,700 shares at 79 cents each.

According to some estimates, home values are down least 12% from their peaks in 2013. But sales volumes have been recovering. And since May last year, there have been 15 collective sales — or en-bloc deals — of residential properties. As we pointed out in our Cover Story last week (“Betting on property stocks”, Issue 799), sellers in en-bloc deals are likely to be hunting for replacement assets. Meanwhile, zealous cooling measures abroad are leading foreign investors to hunt for properties in Singapore. For instance, Hong Kong’s stamp duty on overseas property buyers is now double the additional buyer’s stamp duty in Singapore. Sydney and Vancouver have also raised their stamp duties. Singa pore saw a 20% y-o-y increase in property purchases from foreigners in the first nine months of this year.

Chip Eng Seng is one of the property developers that we expect will benefit from this market rebound. The company had a net asset value of $746 million as at end-June, or $1.20 a share. At 79 cents, the stock is trading at roughly two-thirds its NAV.

The company has a pipeline of residential developments that should add to that NAV. Its 720-unit Grandeur Park Residences in Tanah Merah is 78.4% sold, according to the company’s most recent set of results. Chip Eng Seng also owns 60% of the consortium behind 1,399-unit High Park Residences, which is fully sold. The site was bought for $487 million. The saleable gross floor area is around 1.1 million sq ft, which translates into a gross development value of almost $1 billion. Chip Eng Seng stands to make some $170 million from its share of the development. Collectively, Grandeur Park Residences (above) and High Park Residences are expected to add 40 to 45 cents a share to NAV.

Not included in these calculations is Fulcrum, a 128-unit private residential development near the Katong Park MRT station that is 89% sold. And, in July, Chip Eng Seng and its partners from the High Park Residences project became the top bidder of a land parcel at Woodleigh Lane. Chip Eng Seng, Heeton Holdings and KSH Holdings submitted the winning bid of $700.7 million to develop an 800-unit condominium, which will be ready for sale in 2H2018.

Looking for earnings to rebound

On top of boosting Chip Eng Seng’s NAV and the value of the stock, we are hoping the market rebound will add to the company’s earnings. For 1HFY2017 ended June, Chip Eng Seng’s revenue rose 13.9% to $394.4 million, but earnings fell 54.1% to $7 million on the back of higher cost of sales and other expenses. In FY2016, too, revenue increased 10.6% to $748 million while earnings declined 43.3% to $35.7 million. The fall in profitability was partly attributed to a higher effective tax rate.

In 1HFY2017, Chip Eng Seng reported an 18.2% increase in revenue from its property development business to $231.9 million. Its construction business saw an 8.1% increase in revenue to $142.2 million.

As at end-June, the company had a construction order book of $538.4 million — up from $457.2 million a year ago. The order book consists mostly of housing development projects and public infrastructure works. In May, it won a $110.8 million contract for construction works at Toa Payoh.

Overweight on property With the addition of Chip Eng Seng, nearly 24% of the market value of our portfolio is in the property sector. Part of the reason for this significant exposure is the recovery in property stocks, which have been among the best performers in the Singapore market this year. CapitaLand has risen 18% since we added the stock to our holdings. The property giant has been lightening its balance sheet in the past few years while boosting recurring revenue and cash flow by capping the amount of capital tied to integrated projects and getting its operating units to take on third-party management contracts. CapitaLand has also been investing in overseas projects, which should boost its earnings growth in the coming years.

UOL Group, which gives us exposure to the recovery in the office rental space, is up 16.8%. UOL has a relatively high recurring income base, drawn from rentals, hotel operations and investment ventures. It has office space exposure through its associate, United Industrial Corp.

A more recent addition to our portfolio is Second Chance Properties, which is down 2%. Second Chance has a strata-titled commercial property unit. It owns 17 retail units at City Plaza, which is said to be on its way to an en-bloc sale with potential sales value of $800 million to $1 billion.

Despite early signs of optimism in the local market, these property stocks are still trading at big discounts to their book values and revalued NAVs. We believe they will attract more attention as the property market recovery continues.

This article, written by Trinity Chua, appeared in The Edge Singapore, Issue 800 (Oct 9, 2017), with the title 'Adding developer Chip Eng Seng [to portfolio] as residential market recovers'. The article first appeared online here.

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