FIRST SPONSOR GROUP LIMITED – Staying opportunistic April 28, 2021 253

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.

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About the author

Profile photo of Tan Jie Hui

Tan Jie Hui
Research Analyst
Phillip Securities Research

Jiehui covers the REITs and Property sector. Previously at a sell-side research firm, Jiehui was exposed to news flow and insights from various industries and assisted the property and consumer analysts with their coverage.

She graduated with a Bachelor of Business Management with a major in Finance from Singapore Management University.

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