Chip Eng Seng Corporation Ltd: Strong revenue visibility in FY18 February 19, 2018

PSR Recommendation: BUYStatus: MaintainedTarget Price: SGD1.21
  • 39% yoy jump in contributions from property development segment.
  • Improved occupancies at Singapore and Maldives hotels.
  • Timely replenishing of construction order book with S$168mn design and build contract from HDB.
  • Maintain Buy with unchanged STOP-derived TP of S$1.21 (40% discount to RNAV).

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The Positives

+ 39% yoy jump in contributions from property development segment. Continued progressive revenue recognition from the two substantially sold local residential projects High Park (fully sold) and Grandeur Park Residences (88% sold) should continue to support earnings over the next two FYs. We expect c.S$200mn of development profit contribution from these two projects over the next 2 FYs.

+ Improved performance from hospitality assets. Average occupancy improved for Park Hotel Alexandra (to above 80% vs mid 70% for FY16) and the newly opened Grand Park Kodhipparu, Maldives (50+%). This is in tandem with higher corporate demand and tourist arrivals.

+ Timely replenishing of construction order book with S$168mn design and build contract from HDB. With the latest contract win, total construction order book should stand at c.$570mn currently. We also expect higher margins from the latest contract, possibly in the low teens due to the design and build nature of the contract (vs the mid-single digit margins for typical pure construction projects).

The Negatives

– Slower momentum in Australian residential sales. Willow Apartments is 69% sold as at end FY17 (vs 53% at end FY16). Construction for the project is estimated to complete in March 2018. We expect sales momentum to improve post-construction completion as buyers typically are more receptive to finished products where they can see and feel the product.

Outlook

Revenue for FY18/19 will continue to be supported by the estimated c.$210mn development profits from High Park (GDV S$650mn), Grandeur Park (GDV S$744mn) and Willow Apartments (GDV S$48mn) which will be progressively recognized. The Group’s hospitality assets in Singapore and Maldives should continue to perform better with tapering hotel supply in both countries and improving tourist arrivals. Further RNAV boost could come from a favourable exit from Tower Melbourne.

Maintain Buy with unchanged TP of S$1.21

CES remains a good proxy to the upcycle in the Singapore residential market with its proven track record in execution and well-stocked land bank. The Woodleigh site is due for launch in 3Q18, with an estimated GDV of S$720mn (60% stake) and share price catalyst could come from healthy take-up rates at the launch.    

Figure 1. RNAV Table

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Figure 2: CES trades at close to post-GFC average P/NAV

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About the author

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Tan Dehong
Investment Analyst
Phillip Securities Research Pte Ltd

Dehong covers primarily the REITs and property developer sector. He has close to 7 years experience in equities related dealing and research roles.

He graduated with a Masters of Science in Applied Finance from SMU and Bachelors of Accountancy from NTU.

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