SC Global Developments

2Q FY2009 results. SC Global reported 2Q FY2009 revenue of S$226.4m (+599% yoy) and net profit of S$7.8m (-32% yoy). As SC Global’s stake in AVJennings Ltd increased to 50.03% in December 2008, the revenue of AVJennings Ltd had been consolidated as a subsidiary. This caused a significant increase in SC Global’s revenue. However, as AVJennings Ltd’s property business were mainly high volumes with lower margins, the net profit of SC Global was lower.

Earnings estimates for FY2009F to FY2011F. SC Global’s profit is expected to increase from S$34.0m in FY2009F to S$193.1m and S$195.8m in FY2010F and FY2011F respectively. This is because most of its residential projects are anticipated to be completed in FY2010F and FY2011F.

Outlook for FY2009F. SC Global highlights the recent strength in the Singapore residential property market. We expect it to launch properties for sale only next year when sentiment in the luxury market improves further. On the Australian market, it mentions that AVJennings Ltd continues to face market pressures and challenges.

Maintain HOLD recommendation, fair value raised from S$1.10 to S$1.52. Like other property stocks, SC Global’s share price has risen sharply in the recent rally. We are maintaining our hold recommendation as we feel that there is limited upside from its current share price. Nevertheless, as the sales momentum in the Singapore property market is expected to be strong, we are raising the fair value from S$1.10 to S$1.52. This is a change from 50% to 40% discount to the RNAV. The RNAV has also been raised from S$2.21 to S$2.53 due to the higher than expected increase in property prices.

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SC Global - Super-luxury segment — premature optimism

While the recent pick-up in presale activity has fuelled optimism among the bulls for a speedy market turnaround, we believe the prime super-luxurious segment in which SC Global (SCGD) specialises could be a test for that optimism in the current environment. To begin, the definition of high-end is debatable, and one could argue that a 500 sq ft unit selling for S$2,000psf in a prime location is high-end (in reality, the purchase quantum works out to an affordable S$1mn, which appears to be the magic number/psychological hurdle for most home buyers at the moment).

To qualify for the prime super-luxurious category, the definition is less murky — large units with top-quality finishes that were going for as much as S$4,000psf (for SCGD’s Hilltops) at the peak of the cycle. SCGD averages 1,600-1,900 sq ft/unit, with the exception of The Marq on Paterson Hill (average unit size over 3,800 sq ft) and Martin No. 38 (average unit size nearly 1,400 sq ft).

On our numbers and assuming no price cut, the average purchase price of SCGD’s projects ranges from S$2.7mn for Martin No. 38 to S$15mn for The Marq on Paterson Hills. The assumption of no price cut is not far-fetched, in our view, as SCGD has maintained that it will not cut prices to move units — in essence, brand equity over asset turnover.


We still think it may be difficult for the current optimism to spill over to the superluxurious segment given the existing macroeconomic backdrop. Price-sensitive home buyers, those most likely concerned with job security (our economists expect unemployment to hit 5.2% by year-end), are not the targeted buyers of SCGD’s products and will likely limit any home buying decision to a property that costs S$1mn or less. Wealthy, price-insensitive home buyers, on the other hand, have choices in many other cities that have seen an even more pronounced correction in prime asset prices.

Our valuation methodology of pegging the 12-month price target to the distressed NAV estimate is unchanged for highly leveraged smaller developers such as SCGD. We had, however, valued the Beachfront Collection site at S$415psfppr, previously, working off the then-market clearing price of S$1,100-1,200psf. That price has since moved up to S$1,300-1,400psf in recent months. Accordingly, we raised the valuation for the Beachfront Collection site to S$620psfppr. We left our valuation for The Ardmore site unchanged at S$1,420psfppr, since we think our market clearing price assumption of S$2,400psf remains relevant.

SC Global Developments - 1Q FY2009 results - fair value raised from S$0.67 to S$1.13

1Q FY2009 results. SC Global reported 1Q FY2009 revenue of S$33.0m (+32% yoy) and net profit of S$10.5m (-45% yoy). Revenue was higher due to the consildation of revenue from AVJennings Ltd, which became its Australian subsidiary in December 2008. Net profit was lower because of higer administrative and operating expenses from AVJennings Ltd.

Earnings estimates for FY2009F to FY2011F. SC Global is expected to remain profitable because it has achieved large sales of its residential projects in 2006 and 2007, and revenue will be recognized as construction progresses. Net profit is expected to increase from S$40.7m in FY2009F to S$203.8m in FY2010F based on the percentage of completion of its projects. After that, net profit is likely to fall to S$128.5m in FY2011F as most of its projects have already been completed in FY2010F.

Outlook for FY2009F. SC Global highlights that it is encouraged by the increase in private home sales in Singapore and Australia. It is currently in the planning and design stage for its projects at Ardmore Park and Sentosa Cove. Furthermore, it expects to remain profitable as it recognises revenue from projects that have been sold.

Maintain HOLD recommendation, fair value raised from S$0.67 to S$1.13. We are maintaining our hold recommendation as SC Global has not launched properties for sale recently. Moreover, the luxury property market in Singapore has not registered sales above S$2,500 per square foot for the past three months. However, due to the improvement in buying sentiment for the property market, we are raising the fair value from S$0.67 to S$1.13. This is based on 50 percent discount to the RNAV of S$2.26.

SC Global: A Quiet Start

1Q09 Below. SC Global reported 1Q09 net profit of S$8.9m, down 53% yoy. This formed about 16% of our FY09 forecast and about 19% of consensus. Revenue surged 204% to S$131.2m, though this was due to the inclusion of revenue from AVJennings (AVJ) for 1Q09, which was consolidated as a subsidiary in Dec 2008.

Gearing Stays Relatively High. The Group’s balance sheet continues to be weighed down by its net debt, though net gearing did improve marginally from 2.84x in 4Q08 to 2.75x in 1Q09. The majority of its short-term debt, however, relates to AVJ, which is in advanced negotiations for the extension of banking facilities which mature end-Sep 09. While it is anticipated that the facilities sufficient for AVJ’s normal business operations will be extended, these facilities and liabilities are non-recourse to SC Global itself.

Sentosa Next. It looks likely that Sentosa Beachfront will be the company’s next project due for launch, though this is still at the planning stage. At this point, the company has no plans to relaunch any of the unsold units in its launched projects.

Maintain Fully Valued, TP S$0.74. We believe that unlike the mass or mid market segments, the luxury segment, which SC Global is most exposed to, is unlikely to recover by this year. Nonetheless, we now peg a smaller 40% discount (prev 50%) to its RNAV of S$1.23 (prev S$0.93), in view of a broader macro recovery. We maintain a Fully Valued call, with a new TP of S$0.74.

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.