Due to personal reasons, I will be taking a break from posting on NI forum. So, to share with readers who would like to know more about Chip Eng Seng, which is one of my core stocks, below is a detailed summary of my take on the company.
This is all the info I can gather about CES at the moment, and readers will have to continue to track the counter on their own from hereon, following announcements on SGX (look at its detailed 1H 2012 results review, for eg, for all the important figures), and CES' Singapore and Aussie (given in my earlier post) websites, etc. Currently, only Net Research Asia (NRA) covers the counter - last report in August.
The dishes in the Main Course (ie, the Maths):
CES will post consistently good profits over 2012-2014 and even perhaps 2015 due to the fact that its projects have been mostly pre-sold, and yet almost all the profits are not booked yet for different reasons:
FY 2012 - Although 1H earnings are down, CES' 33M project in Melbourne, where all 388 units are 100% sold, will TOP in Q4, 2012. As the company's policy is to account for revenue and profit for overseas projects only on TOP, we will see a lump sum accounting for this project in Q4. NRA seems to think that this figure could be big, since it projected a net profit of $41.4m (mainly from 33M) for CES in 2H. If this turns out accurate, my estimate of its DPS (dividend per share) this year would be 3ct, same as NRA's estimate.
FY 2013 - CES' 2 EC projects (40% stake in Prive and Belysa) will TOP. Again, 100% of the 995 units are sold, and zero profit is recognized so far, as CES recognizes EC profit only on TOP. My estimate of CES' share of their gross profit: about $45m. Meanwhile, profits from its condo project in Simei, My Manhattan, will stream in more aggressively. Project is now 74% sold, and little profit is recognized as of now. My Manhattan has a big profit margin due to its low land cost. My estimate of gross profit: $85m.
FY 2014 - Its DBSS project Belvia, at Bedok, will TOP. Project is now 80% sold, but zero profit booked, as CES recognizes DBSS profit only on TOP. My estimate of its gross profit: $54m. My Manhattan will also TOP, leading to another substantial recognition of profit and cash inflow.
FY 2015 - Fulcrum at Fort Road will TOP. Project has sold only about 10% to date, but I am not unduly worried because based on CES' track record, it is willing to move unsold units at a slight discount if necessary. It had employed this strategy for Grange Infinite and CityVista. Because of the low land cost and high selling price, profit margin is rich, and my estimate of Fulcrum's gross profit is $74m.
The big dish in the main course:
The Alexandra hotel/retail project - In a news release last month, CES said that the retail podium may provide "further income through sales of retail space and rental income". This gives an indication that at least some shop units are for sale.
The GFA given for the retail space is 95,800 sq ft. However, I am not sure if this is actually the net saleable space, but assuming only 80% of this is net saleable space, it still translates to 76,640 sq ft. NRA put a value of $3,800 psf for this retail space, but assumes CES will not sell all of it. I assume CES does sell all of it (as my impression of the company is that it practices "letting go" rather than "keep, keep, keep"), the sales revenue would be $291m. If the 450 hotel rooms are valued at $650k each, then the hotel portion is worth $292m. Assumption: zero value for hotel's restaurants.
Total value of the redeveloped site is therefore about $583.7m, surpassing the whole development's cost (as indicated in BT report in August) of $350m by $233.7m, or 35ct per share.
If CES manages to carve out its retail space into shoebox units, it will perhaps even boost the selling prices. One Dusun Mall (freehold) in Balestier, for eg, recently sold out all its shoebox shop units at $4,000+ psf to $6,000+ psf.
The side dishes:
1. Apart from property development, CES' construction arm has been clinching HDB contracts recently, apart from building CES' own projects. Just these couple of months, it won 2 HDB contracts: one $210m and another $137m, bringing outstanding construction contracts to $711m.
2. CES owns an industrial site at Pasir Panjang which can be redeveloped. The site is near an MRT station. Potential gross profit: $15-25m.
The sweets (dessert):
CES' 2 outstanding projects in Australia may spring pleasant surprises for the following reasons:
1. The land cost of both sites are low in absolute amount - A$20m for the Perth site, and A$25.5m for 150 Queen Street, Melbourne. Yet because of the potential high plot ratio for both sites, the GDV can be substantial. As an example, the company's 33M project in Melbourne, has a land cost of only A$20.2m, and yet 338 units of apts were built on it, yielding possibly $150-180m in GDV.
If the 150 Queen Street, Melbourne, plan is approved, my estimate of its GDV could be as high as A$200 million (take 555 apt units X A$300k per unit, add $33m for its offices and shops). The one in Perth could have a GDV of A$100-130 million.
2. CES has a good history of selling off its Singapore projects swiftly, and it seems to be repeating that in Australia - its 33M project is 100% sold. I am not certain about the reading of the market in Melbourne, but 33M's sellout gives me some optimism.
3. The maths for the Aussie projects are hard to estimate for now, pending approvals for their plans as well as figures from 33M in Q4. Hence, CES' Aussie projects may be the surprise "sweets" that are waiting to be served at the end of the course.
The Bill (or rather, the Tip?):
RNAV of perhaps $1.30-1.40, depending on assumptions and estimates.
Critic's verdict:
Delicious.
And of high quality - CES has been acknowledged by SIAS 7 times since 2004 for excellence in corporate transparency and governance.
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