Turning round the corner
- Guocoland is due for re-rating.
- Securing ownership of the Beijing Dongzhimen (DZM) project would re-focus investors’ attention to the potential value unlocking upside rather than on the drag from possible provision for cost write-offs that had hampered past share price performance.
- Our scenario study values the stock at a base and bull case RNAV of S$3.84-4.63/share, if DZM is valued on an ‘as-is’ or completed basis.
- Our target price of S$2.88 is based on a 25% discount to our base case RNAV of S$3.84.
The group is on track to achieve a more sustainable ROE by expanding recurrent income base from FY17. Room to move up the value chain to fund management exists in mid-term.
Overhang removed
- With the legal ownership resolved, investors can now re-focus on upside from unlocking value at DZM and not on the possible provision for write-off of costs incurred.
- Management is in the process of evaluating options including divesting DZM on ‘as-is’ basis or to complete and revalue the project, especially when property values have appreciated since the site was acquired in 2007.
- Our analysis values the stock at a RNAV of S$3.84- 4.63/share, on the above bases.
Growing recurring income
- Recurrent income will grow by FY17 when Tanjong Pagar Centre completes and is on track to derive 30% of operating profit from recurring sources (vs <10% now).
- Pre-leasing of office and retail space area are ongoing, with some commitments secured. On the residential front, it expects to continue selling down inventory at its 3 Singapore projects and launching Changfeng Residences in Shanghai in3Q15.
Guocoland Msia – undervalued
- GLM is set to enjoy strong earnings and NAV expansion when Damansara City completes in 2H16.
- We estimate Guocoland’s share of surplus from this mega RM2.5bn GDV project to be cS$182m. In the long run, we expect Guocoland to benefit from the knock-on boost from GLM’s rising NAV as the latter continues to develop its low cost residential landbank.
- In addition, with GLM’s share price trading below book value and Guocoland’s significant 67.94% ownership, another avenue to upstream value could be to consider potentially privatizing GLM.
Trades at 38% below RNAV
- Guocoland is trading at a 38% discount to our base case RNAV of S$3.84, which pegs GLM at current share price. There is upside room to Guocoland’s RNAV if GLM’s share price discount to book NAV narrows or if surplus from DZM is greater than our base case assumptions.
- On earnings, our FY16 numbers do not reflect any proceeds from asset sales in China.
- Key risk to our RNAV estimates is if DZM’s actual cost exceeds our assumptions or lowerthan-expected market value achieved.
(LOCK Mun Yee, TAN Xuan)
Source: http://research.itradecimb.com/
