The drop in price was uncalled for and shares were probably sold by those who don't know better.
Market is selling down on news of a development that will affect the company in 2019/2020 and yet refuse to reflect the value that will be added to it this year.
In any case, designed can be changed, land will still be valuable. There is no risk of CES losing large amounts of money that will shrink its NAV substantially. (that's why we buy at a discount in the first place). The only time a developer is at real risk is when the investment is made (completed building) and plenty of units are left unsold.
Market pricing Roxy Pacific at roughly NAV (inclusive of hotel asset) yet discount other hotel/developers heavily. Oxley is also priced at a premium compared to other developers despite the larger leverage. If anything, the market should be discounting these counters due to poor sales at Trilive & Royal Wharf.
To me, the thesis is still intact and recent events about Carlton Brewery are just too early to predict. Will take this opportunity to accumulate more if prices continue to drop.
At the end of the day, market participants choose what news they want to "reflect" in the prices and what to leave out. No logic there
I tried unsuccessfully to post on NI while overseas, but here it is:
Personally, I think the news on the Carlton Brewery site is at most slightly negative, for the following reasons:
1. The site’s cost (A$32m) is small in absolute term, so even if there is a need to write down, it will not be substantial relative to CES’ profits and assets. Note that it’s a design hitch, not that the land will become worthless.
2. Land cost forms a small part of total cost in Australian developments. For eg, in the case of this site, the GFA is 1,008,642 sq ft, ie, cost of land is only A$32 psf of GFA. This forms less than 4% (vs as much as 40-50% in Singapore) of the eventual selling price of A$800-900 psf. Construction cost and finance cost (due to 10%-only payment before TOP), on the other hand, form a much bigger portion, which means that as long as a building is not yet constructed and big construction financing cost incurred, risks are not too high.
3. There is still a possibility for (a) design changes leading to fewer units (reduced gain but still rather profitable) or (b) Matthew Guy giving the green light despite the objection. Admittedly, risk of slower sales will increase due to the delay, in view of Melbourne’s CBD apartment glut.
4. CES has subsequently bought into (a) the outskirts (Doncaster) and (b) a ready-built commercial space at St Kilda, perhaps a sign of it learning the ropes Down Under.
5. The risk (as in this case) involved in going overseas is normal. Even within Singapore, policy changes can lead to slower demand after a site is clinched, and this is a risk that can’t be avoided unless you want to flee the industry. So, I see the difficulty faced by CES Down Under as the normal greyness you would expect to see in a Koala.
6. For prudence, I have also not accounted for CES’ Aussie projects, preferring to see a clearer picture of things first. So the current rosy picture for CES has no Melbourne structures in it anyway.
On the positive side, the information in the Future Melbourne Committee meeting has shed a bit more light on the Victoria Street project (now subject to changes of course), like the GFA of slightly over 1m sq ft. Using this figure, and assuming NSA (Net Saleable Area) of 750,000 sq ft (assume 75% efficiency), and a conservative ASP (Average Selling Price) of A$850 psf, this would give a GDV (Gross Development Value) of A$640m, a rather substantial figure. Assuming a 15% net profit margin would give us A$95m. For now, I am just keeping this beautiful figure in mind, and not work it into CES’ maths.
Meanwhile, it’s reasonable to expect some selling in the counter due to this news, especially in a stock market that is shaky due to geopolitical and Ebola fears. There could also be some shorting going on, because property stocks are likely targets for such activity due to negative physical market sentiment. In fact, I detect regular (and heavy) shorting in 2 of my holdings: CES and KSH. Of course, that’s just my deduction derived from observation of trading patterns.
Based on latest Q2 results, half yearly net profit of $40mil was a 260% jump against last FY $11mil.
But the most delicious part is yet to come. The Group’s wholly-owned development projects, Belvia and Alexandra Central, are scheduled for completion in 3Q2014 and 4Q2014 respectively. Revenues and profits of both development projects will be recognized upon completion.
These 2 projects are expected to contribute to EPS of about 25 cents to 30 cents based on the recognition upon completion method.
So full year EPS will be at least 31 cents to 35 cents or 200% jump from last FY.
Outside Singapore, the Group will continue to focus on getting its two projects in Melbourne (Doncaster and Victoria Street) ready for launch.
a. The Group intends to launch its residential development in Doncaster before the end of this year. The development will comprise approximately 105 townhouses and 72 low rise apartments.
b. With regards to Tower Melbourne, there are issues pertaining to demolition works. The Group expects a delay in the completion of Tower Melbourne due to ongoing protracted proceedings with
the adjoining owner as to what constitutes adequate protection work over the adjoining property.
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