Taking on debt is part of the normal course of business for developers. Only by leveraging can they achieve a good return on their projects. That's why their balance sheets tend to be highly geared and typical FA methods are not applicable to them.
Developers borrow around 70% of the land tender price, and depending on sales, they might have to borrow to finance the construction. When people purchase the property, they take a loan from the bank to pay the developers. In that sense, the buyer now carries the debt. The key to understanding whether we should worry about the debt is the sales level of the property. If the developer can sell the properties, repaying the debt is not a problem. The problem only arises when developers cannot clear the properties, leaving many units unsold and cannot use the sales proceeds to pay the debt.
2 reasons why I'm not worried about the debt. Firstly, about 90% of all units under development by CES are already sold, so they have no problem with their debt. The debt on the balance sheet is only there because the projects are not built finish. Secondly, The new accounting standard which only allows earnings to be recognised upon completion leaves a lot of earnings unrecognised and debt on the balance sheet as compared to the previous accounting rule. When the projects TOP the debt will drop substantially unless they make major land acquisitions.
Regarding the Multicurrency programme, it's typical of companies with investment properties in the development business to do it. Oxley, Roxy-Pacific, Fragrance all do it too. Most of them use the money they made from development to purchase properties, and use the properties they purchase as collateral to borrow more. It's just like how many of us property owners with fully paid up property use it as a collateral to borrow more and purchase a second property. This is my guess, I'll probably double check with the management in the upcoming AGM of their intended use. As of now, they have not use the facility to borrow aggressively so I'm okay with it.
In terms of risk, I have lumped the major ones under "Aussie risks", which will include construction and demolition woes, risk of buyers defaulting, overheating Melbourne, regulatory changes or ambiguities, currency risks, etc.
I am sure some investors are already wary of CES' land buy in Perth and the demolition delays in TM, for eg. But these are risks inherent in going overseas, and we can weigh them against the possible "going overseas" benefits, the locked in profits of current projects, management's sincerity, dividend payout, etc to decide then what kind of "discount" we would like to provide for a counter, and if after that discount is provided, whether it's worth to invest in it.
Several investors are also worried about the bursting of property bubbles not just in Singapore but worldwide, but again, it's up to us to do our own maths and arrive at our own view on how much of these "worries" are already built into a stock's price.
For eg, some have been fearful of a sharp drop in physical property prices since perhaps 2 years ago, but anyone who had invested in property stocks like Oxley, SB, Hiap Hoe, CES for eg, would have made substantial gains during the period. So, while I expect a 10-20% drop in physical property prices in Singapore in the next 1-3 years, I am not that pessimistic on property stocks that are currently trading at less than half of their RNAV.
I agree, venturing overseas tend to be a blackbox for many companies. We have no choice but to make a judgement call on the management's capabilities. I firmly believe that significant value is present in CES. Looking at the current market cap, it is roughly equivalent to the future hotel asset value + the construction biz. This means all future developmental profits are for free. it's just how they execute it that determines the upside. We'll just have to wait and see.
Posting on CEL Australia website today, on concerns posted in some forums regarding demolition delays in TM, which is more than 95% sold:
18 February 2014
Tower Melbourne Status
CEL Australia would like to inform that there are some delays in the demolition work at Tower Melbourne due to some issues raised by an adjoining owner. We are in the process of resolving these and expect to recommence demolition work as soon as we are granted a demolition permit. We have full confidence in the project and we are still targeting to complete the project by 2017.
