SC Global - No fresh provisions for now

After market close in Singapore, Tuesday, SCGD announced 1Q09 results, where headline numbers are broadly in-line. 36%-sold Martin No. 38 did not contribute to 1Q09 earnings, but we expect profit recognition to kick in later this year as construction progresses. There was no fresh provision made for The Ardmore and The Beachfront Collection sites in 1Q09, but our numbers suggest SCGD may need to make further provisions for the two sites in the coming quarters.

1Q09 EPS of 2.7Scts met 22% of our FY09F EPS forecast of 12.2Scts and consensus FY09F EPS forecast of 12Scts. Martin No. 38 is 36% sold, but did not contribute to 1Q09 earnings but we expect profit recognition to kick in later this year as construction progresses. Other variances from our forecast include: higher- than-expected operating expenses following the consolidation of AV Jennings, higher-than-expected interest expenses, as well as lower-than-expected tax expenses on account of a prior-year tax refund of S$2.4mn. Note that 1Q09 is the maiden quarter of AVJ’s consolidation and therefore year-on-year as well as quarter-on-quarter comparison may not be meaningful.

There was no fresh provision made for The Ardmore and The Beachfront Collection sites in 1Q09. As a recap, SCGD booked an allowance for foreseeable losses of S$30mn for the two sites in 4Q08. On our numbers, we think there could be a need to make further provision for the two sites in the coming quarters. Assuming the provision of S$30mn was made evenly for The Ardmore and The Beachfront Collection, the implied effective land cost is S$1,885psfppr for The Ardmore and S$1,669psfppr for The Beachfront Collection, on our estimates, which still appears hard to justify in the current market.

SCGD did not provide any guidance on when the two developments could be launched for sale, except to say that “the group continues to progress in the planning and design stage for its two sites at Ardmore Park and Sentosa Cove in Singapore.” Given that private home prices in Ardmore Park and Sentosa Cove have already reached some S$1,800psf and S$1,500psf, respectively, in the secondary market, notwithstanding the premium that SCGD’s products typically fetch, the high effective land cost of the two sites clearly limits the group’s options.

For highly-leveraged small developers under coverage, our valuation is based on net asset valuation of the group’s property assets in the distressed scenario, incorporating our core assumptions for the Singapore property market and yet-to-be-launched projects are ascribed current land value.

Changes in equity market risk premium, as well as any unexpected improvement in the outlook for the Singapore economy and physical real estate markets could see the stock trade up and above our distressed NAV estimate.

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