SINGAPORE (Aug 17): Maybank Kim Eng is initiating a “buy” recommendation on GuocoLand with a target price of $2.75 as the group taps on Singapore’s upcycle.
In a Wednesday report, analyst Derrick Heng says, “We believe its small free float, lower trading liquidity and limited analyst coverage are technical reasons for the underperformance and steeper valuation discount when compared to its larger peers.”
GuocoLand reported structural improvements in its financials as the analyst believes that the group’s earnings quality will improve along with the gradual stabilisation of TPC and will lift its recurring EBDITA to over $140 million a year from $40 million in FY16.
“We believe GuocoLand can sustain an 8% ROE in the next few years and see scope for higher DPS,” says Heng.
Singapore accounts for almost 70% of GuocoLand’s valuation and Heng believes that the group is a good proxy to an impending rebound in property prices, as he sees it as a beneficiary of higher home prices as this submarket accounts for 25% of its valuation.
GuocoLand’s near-term earnings will be underpinned by strong pre-sales at Sims Urban Oasis, causing the stock to react positively to improving residential sentiment as sales volume and ASPs rebound off a low base.
However, the group’s stakes in Guoco Tower, 20 Collyer Quay as well as its reversionary interests in prime office space offers a 35% exposure to Singapore’s office market, which the analyst predicts could bottom out by early-2018.
Tanjong Pagar Centre has recently been completed and this opens up options to unlock the property’s value.
“While it could capitalise on strong investment demand today with an outright sale, we opine that establishing a REIT platform may be a better option as it could unlock SGD1.7b of value and retain decent recurring income after that. It would also provide a platform to recycle capital for future developments,” says Heng.
The key risks to the analyst’s evaluation could arise from a sharp fall in property prices in Singapore and China.
As at 3.20pm, shares in GuocoLand are trading 5 cents higher at $2.09.
