Soilbuild Group: Better outlook, upgrade to BUY

Results above expectations. Soilbuild Group reported its 2Q09 results that exceeded our expectations. Revenue increased by 10.1% YoY and 49.7% QoQ to S$96.9m, driven by additional revenue recognition from Leonie Parc View, Montebleu, The Centrio, Tuas Lot and maiden contribution from Heritage 9. Recurrent rental income rose 38% YoY with the leasing of newly-completed business space. While PATMI fell by 14.7% YoY to S$19.7m due to higher cost provisions for ongoing projects, it increased marginally by 3% QoQ.

Strong sales achieved in 1H09. As at 31st July, Soilbuild had achieved sales (including Options to Purchase) of S$207m from residential and business space projects. This brings the total sales value to S$638m, of which more than 50% of the amount (S$319m) has yet to be recognized. With the launch of Meier Suites, Soilbuild does not have any landbank left and we take a positive view on this as we think current environment is a good opportunity for developers to lock in revenue visibility and for Soilbuild, it can also realign its focus towards its large-scale business space projects.

Convertible bond overhang removed. At the end of July, Soilbuild successfully repurchased S$42.5m in principal amount of the convertible bonds after the bond holders exercised their put options. Following the repurchase, there will be no outstanding bonds remaining. Even though we had previously said that there is no liquidity concern in the event of an early redemption of the bond, recent cases of companies facing liquidity issues with bond redemptions may have sent a negative signal on companies that carry such instruments. The removal of this overhanging concern could provide a positive catalyst to Soilbuild's share price going forward.

Fair value raised to S$1.36; Upgrade to BUY. Construction schedule for Leonie Parc View was ahead of our expectations and we are now raising our FY09 revenue and PATMI forecasts to S$376m and S$86m respectively. Our RNAV estimate has now been raised to S$1.70 per share (previously S$1.55) to reflect our new selling price assumptions for Heritage 9 (S$1,300 psf) and Meier Suites (S$1,300 psf). With the strong sales of its new projects and repurchase of the bonds, outlook has improved significantly. As such, we are now lowering our RNAV discount from the previous 50% to 20%. Our fair value has now been raised to S$1.36 (previously S$0.77). Valuation remains attractive as Soilbuild is now trading at Price/Book of 0.88x and Price/RNAV of 0.54x. With an upside potential of 47.7%, we are now upgrading Soilbuild from HOLD to BUY.

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