With the exception of Bukit Sembawang Estates, developers have had a tough 12 months. The pandemic has upended certain sectors of the economy, causing revaluation losses in malls, hotels and serviced residences. In addition, developers and the REITs they sponsor had to provide rental support for their SME tenants. All these impacted earnings. Downward revaluations in properties also affected NAVs and, in many cases, raised gearing ratios. CapitaLand and City Developments (CDL) announced headline losses.
Elsewhere, Frasers Property (FPL) announced plans to raise $1.28 billion through a dilutive rights issue in the ratio for 35 new shares for every 100 shares, at $1.18 each. This represents a significant discount to the pre-rights NAV of $2.58 and pro forma NAV of $2.20 post-rights.
FPL’s cash flow is facing challenges, and the developer and its major shareholders may just want to ensure the company has sufficient financial flexibility to “enhance business resilience through continued exposure to industrial, logistics and business park assets”. Among other factors, FPL hopes to build “financial agility through capital partnerships”. Some 54.7% of the proceeds would be used for investment, acquisitions and capital expenditures, 19.5% will be used to set up private funds, and the remaining for general corporate purposes.
Should only Thai Beverage Public Co (ThaiBev) and privately-owned TCC Assets take up their pro rata share, and the minority shareholders do not, ThaiBev and TCC Assets will own 89.8% of FPL, a sliver away from 90%, a level where it is compulsory for the issuer to acquire the remaining shares.
Market watchers believe that ThaiBev, which is planning an IPO of its BeerCo of around US$2 billion ($2.7 billion), is likely to recycle capital, from its mature BeerCo assets which may be fully valued, to undervalued FPL.
BeerCo carries out production and sales of beer under brands such as Chang Beer, German-inspired Federbrau and budget Archa. Vietnamese brands Bia Saigon and 333, which were obtained through a US$4.8 billion acquisition of Saigon Beer Alcohol Beverage (Sabeco) in 2018, are also under BeerCo.
Still, the challenges facing developers may cause investors to look elsewhere for higher returns. The property agencies are assetlight companies, have higher ROEs, and are generally both operating and free cash flow positive. APAC Realty (See story on Page 12) is Singapore’s second largest agency, while PropNex is the largest by number of agents. These two companies could be a better proxy for local residential property sales, although margins are relatively thin.
APAC Realty announced a 17.8% rise in net profits to $16.3 million in FY2020 ended December 2020, while PropNex announced a 47.8% rise in net profit to $31.22 million. But both agencies experienced mild y-o-y declines in net profit in 2HFY2020. APAC Realty’s net profit was down 2.2% y-o-y to $8.64 million in 2HFY2020. PropNex’s net profit fell 1.5% y-o-y to $8 million in 4QFY2020.
According to RHB Bank, APAC Realty’s FY2020 net profits comfortably beat consensus, aided by a rebound in residential volumes and government grants. Sales momentum stayed strong with January new home sales hitting an eight-year high. APAC Realty is well positioned to benefit as the group commands 33% market share of total residential transactions, RHB says.
In its business update, PropNex said demand for HDB resale flats should stay relatively healthy, as the rising supply of newer resale flats entering the market will help stimulate demand and support prices. An estimated 25,530 HDB flats could reach their fiveyear Minimum Occupation Period this year, higher than the 24,163 flats in 2020. PropNex expects HDB resale prices to rise by 3%–5% this year and volume could hit 25,000 units on keen buying interests. PropNex also expects private home prices to climb by between 3% and 5%.
Another factor lending support to increasing prices is the declining unsold inventory which has dropped to 24,296 units at the end of 2020, from 26,483 units in 3Q2020. The company iexpects some 19,000 private residential units to be transacted in 2021, provided no new cooling measures are implemented. PropNex is planning on gaining market share by attracting more agents with a target of 10,000 for this year, up from 9,117 as at February 2021.
“PropNex’s strategy of attracting potential buyers through consumer events and providing value-add and consumer education tools such as Monopoly PropNex Edition, should enable it to continue to gain market share traction, in our view,” CGS-CIMB says in an update.
Investors looking for a proxy to the Singapore residential market with a preference for a developer could look at Bukit Sembawang. It adopts historical cost accounting and hence its landbank is valued at cost. Lim & Tan initiated coverage of the stock in February with a “buy”. “More than 90% of Bukit Sembawang’s land bank is undervalued. The cost is estimated at $50 psf while its approximate selling price is at $750 psf,” Lim & Tan points out.
The local brokerage expects dividends to rise to 20 cents against a “backdrop of healthy sales and growing cash flows”. A dividend payout of between 20 cents and 33 cents would imply a dividend yield of 4.8%–7.4%. For the fiscal year ended March 2020, the company paid out a total dividend of 11 cents.
In summary, investors looking for value could opt for Bukit Sembawang while those looking for returns in earnings could look at the agencies. For investors looking at a proxy for a post-Covid world, CapitaLand’s NAV looks increasingly like it could be boosted by a recovery in the values of its lodging and retail assets.
