Excerpts from contributor's article published on NRA Capital's website
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Property Group holds S$1.1 billion of assets. Alternatively, the company may choose to spin-off only its property development projects and retain the investment properties and completed dormitories within the parent company.
However, we see this scenario as unlikely as the property development company may from time to time develop properties designated as investments. Administratively, it will be easier for the property development company to hold these properties on its balance sheet, than to sell them to the parent company on completion.
The inclusion of investment properties in the spin-off is significant as the group has S$711.3m of investment properties on its balance sheet as of 1Q FY18 ended 31 August 2017. We estimate that the Property Group may hold at least S$1.1 billion of assets based on the group’s balance sheet as of 1Q FY18 ended 31 August 2017.
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Balance Sheet |
S$m |
|
Investment properties |
711.33 |
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Investment in joint ventures |
19.01 |
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Investment in associates |
43.86 |
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Amounts due from associates |
45.00 |
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Development properties |
185.53 |
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Amounts due from joint ventures |
66.72 |
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Amounts due from associates |
89.17 |
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Estimated Property Group Assets |
1160.61 |
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Other assets |
448.88 |
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LB Group Assets |
1609.49 |
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LB Group bank loans |
647.55 |
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LB Group Liabilities |
278.73 |
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LB Group common equity |
603.41 |
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Minority interest |
79.80 |
Incidentally, the FY17 pre-tax return on net assets of 10.5% works out to an after-tax amount of 8.7% after deducting for 17% tax. This also implies an appropriate fair value of around 0.87x price-to-book given an earnings yield of 10%. As of 31 August 2017, Lian Beng had a net asset value per share of S$1.2076.
We assume that the bulk of investments in joint ventures and associates are in the property business.
Based on disclosures in the FY17 annual report, the material joint ventures and associates are all in the property development, investment or dormitory businesses, leaving other joint ventures and associates with a carrying value of about S$5.6m.
Investment in Joint Ventures and Associates as of 31 May 2017
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S$m |
Description |
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Investment in associates as of 31 May 2017 |
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Oxley-Lian Beng |
22.97 |
Developer of MidTown Residences/The MidTown |
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Spottiswoode Development |
8.91 |
Developer of Spottiswoode Suites |
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Other joint ventures |
2.66 |
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|
34.54 |
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Investment in associates as of 31 May 2017 |
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Centurion-Lian Beng (Papan) |
8.49 |
Owns ASPRI-Westlite Papan workers' dormitory and training centre |
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Epic Land and its subsidiaries |
10.82 |
Owns strata office units in Prudential Tower |
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Oxley Bliss |
15.82 |
Developer of Tampines Industrial Crescent project with Oxley |
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Oxley Sanctuary |
5.92 |
Developer of KAP Residences |
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Other associates |
2.92 |
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|
43.97 |
Source: Annual report
As of 31 August 2017, Lian Beng has S$185.5m of development properties on its balance sheet. However, many of its projects are undertaken via joint ventures and associated companies that are not consolidated on the group’s balance sheet. Some of Lian Beng’s associated development projects include KAP Residences (former King Albert Park), Floraville/Floraview/Foravista and the Gaobeidian project in China. Investments in joint ventures and associates, including amounts due from them, totaled another S$263.8m as of 31 August 2017.
Rebuilding property development pipeline. More recently, the group has started to participate more actively in the Singapore market again. In May, its joint venture company successfully bided for a 36,811.1 square metres (395,350 sq. ft.) site known as Rio Casa at 344 to 350 Hougang Avenue 7, with a potential plot ratio of 2.8x. Based on data from joint venture partner Oxley Holdings, the site has an estimated gross development value of S$1.42 billion as opposed to a purchase price of S$575m and an estimated differential premium of S$208m to renew the land lease to 99 years. This works out to a land cost of S$707 per sq. ft. per plot ratio versus an estimated average selling price of S$1,283 per sq. ft. per plot ratio.
In July, the group also successfully tendered for a 27,583.9 square metres (296,251 sq. ft.) site known as Serangoon Ville at 128 – 134 Serangoon North Avenue 1, with a potential plot ratio of 2.8x, via a joint venture with Oxley and other partners. Based on data from Oxley, the site has an estimated GDV of S$1.28 billion versus the purchase price of S$499.0m and an estimated differential premium of S$195m. Accordingly, the land and differential premium sums to S$837 per sq. ft. per plot ratio while the joint venture expects the property to be sold at S$1,543 per sq. ft. per plot ratio.
Meanwhile, the S$699m construction order book stretches to FY2020. Meanwhile, the Construction Group has been securing contracts, such as the S$435m 36-month contract to build a high rise industrial complex at Kim Chuan Road (secured in March 2017) and the S$162m 36-month contract to build a condominium development at Martin Place (secured in September 2017). As of 15 September, the Group’s order book stands at S$699m. Split over three years, it translates to construction revenue of S$233m per annum. In FY17, the Construction segment reported revenue of only S$103.5m. Assuming an average net margin of 5%, we can expect this segment to generate net profit of S$11.65m per annum.
Construction Segment
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FY15 |
FY16 |
FY17 |
FY15 to FY17 |
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Revenue |
628.81 |
348.93 |
103.46 |
1081.21 |
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Segment pre-tax profit |
39.83 |
10.74 |
24.43 |
74.99 |
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pre-tax margin |
6.3% |
3.1% |
23.6% |
6.9%* |
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*6.9% x (1 – 17% tax rate) = 5.8% eff. after tax margin. We assume 5% net margin. |
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Valuation Workings – Investment Properties
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Investment Properties |
FY16 |
FY17 |
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Investment properties |
438.53 |
703.86 |
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Investment properties held for sale |
0 |
26.28 |
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Total |
438.53 |
730.14 |
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Investment properties under construction |
76.54 |
115.50 |
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Rental yielding investment properties |
361.99 |
614.64 |
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Rental Income |
FY15 |
FY16 |
FY17 |
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Gross rental income |
22.79 |
24.34 |
32.08 |
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Other operating income |
0.40 |
0.41 |
0.38 |
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Direct operating expenses |
-7.10 |
-8.77 |
-14.96 |
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Operating rental income |
16.09 |
15.98 |
17.50 |
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Margin |
70.6% |
65.7% |
54.6% |
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Average gross rental yield |
6.6% |
Rental income of S$32.08m / Average of rental yielding properties S$361.99m and S$614.64m |
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Investment properties as of 31 Aug 2017 |
711.33 |
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Acquisition of Wilkie Edge (50% stake of S$280m) |
140 |
Completed in September 2017 |
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Expected Investment properties |
851.33 |
711.33 + 140 |
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Expected gross rental income based on 6.6% yield |
55.9 |
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Margin |
70% |
FY17 rental margin could have been higher due to higher repairs and maintenance expenses with the addition of S$278.6m of investment properties in FY17 |
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Expected operating rental income |
S$39.2m |
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Assumed borrowings |
S$595.93m |
@ 70% of carrying value of properties of S$851.33m. Property Development and Investment Holding segments carry liabilities equivalent to 70% to 80% of assets. |
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Financing cost @ 3% |
-17.88 |
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Pre-tax rental income |
21.27 |
S$39.2m, less S$17.88m |
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Taxation |
-3.62 |
@ 17% |
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Net rental income |
17.66 |
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Implied fair value / equity |
255.40 |
S$851.33m less S$595.93m. |
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Effective yield |
6.9% |
S$17.66m / S$255.40m |
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Gearing
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FY15 |
FY16 |
FY17 |
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Finance costs (including capitalised costs) |
6.90 |
11.78 |
13.98 |
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Amts due to JV |
33.15 |
30.12 |
17.82 |
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Amts due to associates |
12.93 |
16.35 |
1.36 |
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Bank loans |
277.16 |
428.06 |
680.50 |
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Hire purchase |
15.78 |
12.58 |
7.00 |
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Total debt |
339.03 |
487.10 |
706.68 |
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Average borrowing cost |
2.9% |
2.3% |
Note: As per the FY17 annual report, borrowing costs range from 1.1% to 4.5%. We assume 3%, which is slightly higher than the effective borrowing cost in FY17 and in line with that of FY16.
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Development Property Business as of 31 August 2017 |
S$m |
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Development properties |
185.53 |
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Investment in joint ventures |
19.01 |
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Amounts due from joint ventures |
66.72 |
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Investment in associates |
43.86 |
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Amounts due from associates |
45.00 |
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Amounts due from associates |
89.17 |
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Development properties, associates and JV |
449.28 |
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Assumed gearing @ 50% |
-224.64 |
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Equity |
224.64 |
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10% discount (no development profit factored in) |
-22.46 |
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Deemed fair value of development properties and associates and JVs |
S$202.18 |
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Sum-of-Parts Valuation
Potential fair value of S$1.08 per share or 53% upside. Currently, Lian Beng trades at just 7.1x trailing 12-month P/E. We reckon that the low P/E multiple is partially due to the Group’s heavy balance sheet, comprising of mainly investment properties, and losses from the Manufacturing of Concrete and Asphalt. |
| [Click here for the full article contributed by Mr. Tay Eng How, a former journalist with the Singapore Press Holdings. While NRA Capital has edited and provided inputs to the article, the above views belong to the contributing writer and should not be construed as an investment recommendation.] |
