Hiap Hoe announced yesterday net profit for 9M dropped 28.5% to $18m. EPS was 3.84cts, and an interim dividend of .25 cts was declared.
Dissecting the results:
1. A $9m marketing expense during the 9M (compared to only $700k in 2009) as a result of launch of Waterscape contributed to the bulk of the profit drop. This is a mismatch of revenue/expense and not a cause for worry.
2. Very little of the profits from Waterscape and Skyline are realised in Q3. The breakdown is such: Signature at Lewis (not a very profitable project, 10% more revenue realised in Q3, assume 100% sold, effective amount of profit realised: 10%), Skyline (assume 40% of GFA is sold even though 50% of units are sold, because most sold units are of the smaller sizes, 5.7% more profit is realised in Q3, hence effective amount of profit realised: only 2.28%), Waterscape (assume 60% of GFA is sold, even though over 70% of units are sold, 3.8% more profit is realised in Q3, hence effective amount of profit realised: only 2.28%). Using my profit estimates for these 3 projects ($10.4m for Signature, $91.6m for Skyline and $185m for Waterscape), my gross profit will come up to $8.25m (10% X $10.4m, 2.28% X $91.6 and 2.28% X $185m) not far off from the reported $9.688m.
3. What the above calculations show is that my estimates of the profits from Hiap Hoe's projects are quite near to what is reported so far. This also means that if Hiap Hoe continues to slowly clear the remainder units in its 2 major projects (Skyline and Waterscape), it will be on course to report big profit figures in forthcoming quarters. For eg, in the case of Waterscape, assuming 60% of GFA is sold, for the 5.8% revenue (and profit) accounted for so far, only $6.438m profit has been reported. In other words, for the 60% of GFA sold, $104.5m profit is yet to be reported, and if 100% of the units are sold, $178.5m profit will slowly be reported over the next 2-3 years. The same story goes for Skyline.
4. Hiap Hoe has yet to book revenue from The Beverly, which is, I believe, mostly sold except for some penthouses.
5. Upon completion of its Zhongshan Park, Hiap Hoe will have exposure to 3 more sectors of the property market: hotels (with room rates rising, this is a big plus for its 2 hotels there), commercial, and office (there will be a block of office in this project, and office values are rising).
Some hotel counters moved yesterday and today, for eg, Roxy-Pacific, St Land and Guoco Leisure.
A hotel play that is out of the radar is Hiap Hoe, which is building 2 hotels with a total of about 800 rooms on its Balestier's Ah Hood site. This big project will also contain a shopping centre and an office block - and office space is back in vogue.
Hiap Hoe & Superbowl clinched the Balestier site at a dirt cheap price of $73.3m back in the days when nobody dares to buy any land, in the heart of the financial crisis in August 2008. I estimate the 2 companies are now sitting on a pile of paper profit at least $200m, or $100m each. In Hiap Hoe's case, that would be a paper profit of at least 21cts per share.
Added to this, Hiap Hoe has not booked as much as 90% of the profits from its 2 hugely profitable condos - Skyline 360 and Waterscape. Hiap Hoe could make as much as $270m gross profit from these 2 projects if fully sold (they are about 50% and 70% sold so far). This means that as much as $243m gross profit - ie, about 51.5cts gross earnings per share) from these 2 projects are not booked yet!
Add all these paper and unbooked profits alone to Hiap Hoe's present NTA of 40cts, and it's clear that the stock's share price has a lot to catch up with its fundamentals over the next few quarters.
Fundamentally, the stock looks solid. It's probably just waiting to be discovered by some analyst.
Today's news that the hotel site at Ogilvy Centre, Robinson Road, has been sold for $1,072 psf ppr highlights how land prices for hotels have surged over the past year, and allows us to dig up and recall how some companies which bought such land earlier are sitting on pots of gold.
One example is Hiap Hoe/Superbowl. Their joint venture clinched its big hotel site at Ah Hood Road (Zhongshan Park) for a pittance in comparison, deep in the liquidity crisis of 2008, when no one dares to bid for any land.
Here's a report from the press at that time: "The winning bid from HH Properties, a joint-venture between Hiap Hoe and sister company SuperBowl Holdings, was S$73.3 million or S$172.09 per square foot per plot ratio – significantly below the S$350-S$470 psf ppr that analysts indicated for the site when it was launched in late March."
Hiap Hoe and Superbowl paid a mere $73.3m for the huge site which it is now constructing nearly 1,000 hotel rooms, an office block and a shopping centre! The price of $1,072 psf ppr paid by the winner at Ogilvy Centre is 6.3 times the price paid for by Hiap Hoe and Superbowl! And that site can build 200 hotel rooms compared to 1,000 at Hiap Hoe/Superbowl's site.
By my estimate, Hiap Hoe and Superbowl are comfortably sitting on a $200m paper profit on its Zhongshan Park site. For Hiap Hoe, its 50% share works out to about 21 cts of "unrealised" profit per share, while for Superbowl, it's even higher, at about 30.7 cts per share!
Yes, stock does look attractive at current price, and that's probably why the company has done 4 share buybacks over the past month, the biggest being on 11 march, when 395,000 shares were bought at 41cts.
I was disappointed with company's 0.5cts dividend payout for year ended Dec 2010, but I guess Hiap Hoe may be preserving cash for opportunistic land purchases should the property mkt make a sudden, sharp turn down. This is what happened in 2008, when Hiap Hoe bought a piece of land in Balestier right in the middle of the financial crisis, at a very low $172psf ppr. That has allowed it to potentially make a paper profit of $100m (its 50% share) once the hotel/office/retail complex is completed.
Already, the co has bidded for govt land recently, although its opportunistic bids means it's right at the bottom of the list of bidders! But it's ok not to win bids at the moment, as margins could be too thin, and be easily wiped out should the property mkt turn down. But at least now we know why Hiap Hoe has not dished out big dividend payout although it can well afford to.
Meanwhile, Co will be previewing its Skyline 360 project again, in about a week's time, this time at Four Seasons Hotel. It has also slowly and quietly sold some units at Skyline, Waterscape and The Beverly over the past few months.
Although I would have preferred the company be more aggressive in marketing its condo units, there are other 2nd liner developer stocks to own should one prefer more aggressive mgt. Hence, apart from Hiap Hoe, I do own the other 2nd liner prop counters like Roxy (more aggressive no doubt), Tuan Sing, Chip Eng Seng (definitely the one to own if u like agressiveness), Heeton, etc.
While there has been much fear that the Sg property mkt will be turning down as a result of one govt measure after another, many 2nd liner property counters are trading at such big discounts to RNAV that they almost look like pricing in a 30-40% drop in physical property prices. Hence, while I am concerned like many do about the physical property mkt seeing a 10-20% dip in prices, 2nd liner prop stocks don't appear that risky at current prices simply because stock investors had already moved ahead and lightened or gotten rid of their holdings in prop counters.
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