FIRST SPONSOR GROUP LIMITED – Staying opportunistic April 28, 2021 514

PSR Recommendation: ACCUMULATE Status: Downgraded
Target Price: 1.56
  • Operational update suggests company is on track for record FY21 pretax profits, bolstered by property development and property financing.
  • Unrecognised gross development value was S$620mn, after S$180mn recognised from handover of SOER, EoO and Plot F. FSG’s share of gross development value for unlocking from existing projects was S$3.2bn, before New Humen.
  • New Humen project to increase its property-finance loan book by 30% and FSG’s exposure to Dongguan where residential demand is still holding up. Hotels underperformed.
  • Downgrade to ACCUMULATE from BUY as recent run-up has priced in some positives. SOTP target price unchanged at S$1.56.

The Positives

+ S$180mn recognised from handover; at least S$115mn worth of GDV for recognition in 2Q21 and 3Q21. In 1Q21, FSG handed over 47% of office space and a remaining SOHO block at Star of East River (SOER) as well as two residential blocks at Emerald of the Orient (EoO). We estimate it recognised S$180mn GDV from these projects in 1Q21. The remaining S$50mn should be recognised over the next two quarters. Unrecognised revenue from the Pinnacle and Plot F of Millennium Waterfront was S$372mn as at December 2020. Revenue recognition has begun for Plot F, with the handover of 87 of its 807 units. We estimate this translated into S$10mn worth of revenue in 1Q21. Remaining sold units will be handed over in 2Q21, which could potentially yield S$65mn in sales recognition. Eight residential blocks sold at the Pinnacle are expected to be handed over in phases from late 2021.

 

The Negatives

– Hotels underperformed; 33%-owned FSMC to defer interest payment. Demand for both regional and city hotels was affected by Covid-19 restrictions. Only hotels in Chengdu Wenjiang managed to book EBITDA of RMB1.9mn in 1Q21. Most of FSG’s owned European hotels operated at EBITDA losses despite subsidies from the government. Occupancy is typically weaker in the first quarter of the year due to fewer events and public holidays. 1Q21 occupancy at its 31.4%-owned Dutch Bilderberg hotels dropped to 9.6% from 46.5% in 1Q20. RevPAR fell 83% YoY to €15. Given this, 33%-owned FSMC group deferred its €4.2mn interest payment in 1Q21 on loans extended by the group. FSG does not expect any recovery issues for the deferred interest and loan principal.

 

Reverse-roadshow highlights

Dongguan market still hot. Despite price ceilings placed on Dongguan’s residential properties, prices are still going up and inventory in the municipal is low. A typical holding period for outside central residential property is 3.6 months. Within the central region, the holding period is 1.8 months, before the units are snapped up. Even though some units have a stipulated holding period of five years or so before they can be sold, buyers have been paying upfront to reserve units.

 

Property financing business is less risky than most may think. FSG only lends on real estate it is willing to own. Before 2020, it had just two default cases. In both cases, it succeeded in recuperating principal and penalty interest, after collateral auctions. Loans are typically secured on LTVs of 50% or lower. Penalty interest is much higher than initial interest. In 2020, FSG commenced legal action against a borrower group with two cross-collateralised loans due to arrears for a month’s interest for eight months. FSG privately settled with the group on 16 March 2021, which has paid its first monthly instalment and prepaid its second monthly instalment in April 2021.

 

Outlook

FY21e record pretax profits expected. Development sales yet to be recognised stand at S$620mn, after S$180mn recognised from the handover of SOER, EoO and Plot F. FSG’s share of GDV for unlocking from existing projects is S$3.2bn. This excludes its new Humen project, which is expected to contribute more to property financing.

 

On 22 April 2021, FSG formed a JV with a wholly-owned subsidiary of a HKSE-listed property development company to develop a land parcel in Humen, Dongguan into a predominantly residential project (Fig. 2) . The new Humen project lies between the Group’s Humen TOD and The Pinnacle sites and is well connected within the Greater Bay Area. FSG has an effective stake of 48% in the JV.

 

FSG will extend loans of S$84mn and S$90mn by way of junior and senior convertible bonds with annualised coupon rates of 15% and 12% to finance the acquisition and their conversion from industrial to residential use. Any surplus cash in the JV will be used to first repay all amounts outstanding under the convertible bonds. Any residual cash balance shall be distributed to the HK listco’s subsidiary and FSG in the proportion of 75.05% and 24.95% respectively. In our view, this deal sholuld add value to both FSG’s property financing and development businesses. It will increase FSG’s PRC loan book from RMB2.6bn to RMB3.5bn, while providing FSG with development upside from yet another project in Dongguan, where demand for residential properties is unrelenting. The convertible bonds are expected to be released by end-May.

 

European hotels to turn around gradually. Despite still-high COVID-19 infection rates, lockdown measures in the Netherlands are expected to ease from next week. Its national hospital association indicated that the worst of the country’s third-wave infections might be over, as the number of new patients dipped in the past week and COVID-19 vaccinations among the elderly gather pace. A nationwide night-curfew that has been in place for three months will be lifted on 28 April 2021. Bars and restaurants will be allowed to serve small groups on outdoor terraces in the afternoon. Universities and colleges will gradually reopen and stores will be allowed to admit more customers. The Dutch government is also allowing for larger events to take place. For instance, the Eurovision Song Contest 2021 is due to take place in Rotterdam in May. This reopening bodes well for the hotel sector.

 

Strong balance sheet to capitalise on new opportunities. FSG is backed by a strong balance sheet, substantial unutilised committed credit facilities and a potential equity infusion from the exercise of outstanding warrants. In April 2021, the Group refinanced a S$225mn committed revolving credit facility and extended its maturity date by four years. This should further strengthen its cash resources to capitalise on new business opportunities.

Important Information

This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.

By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.

The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.

Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.

This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.

Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.

Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.

Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.

To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.

The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.

This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.

This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.

IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE

Where the report contains research analyses or reports from a foreign research house, please note:

  1. recipients of the analyses or reports are to contact Phillip Securities Research (and not the relevant foreign research house) in Singapore at 250 North Bridge Road, #06-00 Raffles City Tower, Singapore 179101, telephone number +65 6533 6001, in respect of any matters arising from, or in connection with, the analyses or reports; and
  2. to the extent that the analyses or reports are delivered to and intended to be received by any person in Singapore who is not an accredited investor, expert investor or institutional investor, Phillip Securities Research accepts legal responsibility for the contents of the analyses or reports.
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments

Get access to all the latest market news, reports, technical analysis
by signing up for a free account today!