Besides Luxus Hills Phase 1, BS has two other projects that are launch-ready — a prime luxury condominium project called Vermont at Cairnhill (freehold, 123 units) and a waterfront landed housing project called Watercove Ville in the northern part of Singapore, next to the Sembawang Park (freehold, 80 units). We had previously assumed that Watercove Ville would be launched for sale in the current financial year, together with Luxus Hills Phase 1, but the likelihood of deferral has increased, in our view. To begin with, we think the Straits of Johor frontage and the serenity of Sembawang Park will allow the project to fetch a bigger premium if it is launched after the current property downcycle, and BS has the balance sheet to push back the launch, following the recently concluded rights issue (in any case, the carrying cost of the site is also relatively low). Further, management’s cautious stance suggests a parallel launch of Luxus Hills Phase 1 and Watercove Ville this financial year is unlikely. In fact, because of the higher carrying cost of Vermont, we believe BS is looking for the opportunity to release Vermont for sale first.
We think Vermont is trickier. Next door, Vida (FH, 132 units) sold more units in April and May (project was 59% sold as at end-April) at more than S$2,000psf (with a twoyear yield guarantee). However, Vida’s units are all small ones, comprising entirely one- and two-bedroom units that start from 517 sq ft. This means that while the psf price is high, the average purchase quantum of slightly over S$1mn is still low enough to entice buyers to take up units in the current market.
Vermont, on the other hand, is made up of larger units — about 1,600-1,700 sq ft each on average — and as such, it may be unrealistic to expect Vermont to be priced similarly to Vida on a psf basis. The other new project in the vicinity, Hilltops (freehold, 241 units), has large units (about 1,800-1,900 sq ft each on average) but the project was only 12% sold at near S$4,000psf during the peak of cycle and, unsurprisingly, there have been no secondary transactions since. In short, what is tricky about Vermont for BS is that the price discovery process for the project may not be a clearcut one. That said, on the flip side, one can perhaps then argue that if and when BS decides to proceed with the launch of Vermont, it can be viewed as a bullish sign in the sense that the price discovery process for large units in prime locations has been completed from the perspective of the management, which we believe has hitherto been inclined towards the cautious side of things.
BS’s 4Q FY09 (year-end March) results confirmed our belief that the site in question for a potential provision for foreseeable losses to be made, was Fairways. The S$70mn provision made brought the effective land cost of the freehold site in Telok Blangah from the original S$255.1mn (or S$785psfppr) to S$185.1mn (or S$570psfppr). We think the move was prudent on BS’s part and increased its chance to tap the mass- to middle market condo market, especially taking into account the apparently smaller units of the proposed development. Based on existing plans, a 270-unit condo will be built on a GFA of 325,000 sq ft (or circa 1,200 sq ft each unit on average). Still, the risk of further provision remains, in our view. To put things in perspective, units at next door Harbour View Towers (99-year, completed in 1994) are transacting at some S$700psf in the secondary market. Even allowing for a longer land tenure and newer development, the margin implied by the adjusted land cost of S$570psf appears thin, especially if construction costs trend higher.
Our valuation methodology of pegging the 12-month price target to the distressed NAV estimate remains unchanged for highly leveraged smaller property developers like BS. We had, however, valued Luxus Hills Phase 1, Vermont and Watercove Ville on an estimated land value basis previously. Considering the group’s more prudent capital structure following the recently concluded rights issue, we think BS has the ability to deliver the three projects to the market within our forecast period. As such, we now value the three projects on a completion basis, pricing them at our projected trough valuation. In addition, we have raised the estimated land costs for the remaining phases of Luxus Hills, Lot 12949A Phases 1 and 2, Lot 9934W as well as Fairways by 5% to reflect a less bearish stance on the mass market segment. Consequently, our distressed NAV estimate and price target is raised from S$2.76 to S$3.43 (+24.3%).
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