Singapore Land - Hospitality business continues to be weak

Due to a net fair value loss on investment properties to the tune of $395.7m, SingLand posted a net loss of$344.7m in 2Q09. However, core operating net profit was in-line with expectations, growing 16% yoy as aresult of positive rental reversion and cost management. No interim dividend was declared.

SingLand suffered a total fair value loss of $492.1m on its investment properties versus six months ago(11%-decline). Such fair value loss is rather academic, as SingLand’s business model seldom involvestrading of the investment properties. SingLand’s businesses are cashflow generative, and on a sequentialbasis, SingLand’s gross revenue from its investment properties remained flat.

The revenue from Pan Pacific Hotel Singapore slumped by 33% yoy due to lower room rates andoccupancy rates, as well as lower F&B revenue. Similarly, associated earnings from Marina Mandarin andMandarin Oriental hotels are also lower. It is also in-line with the overall weak tourism sector, as well as theH1N1 pandemic concerns.

We have lowered our estimated breakeven cost for the Trizon to $1,280 psf, due to lower expectedconstruction costs. However, despite the resurgence of strength in the private property market, we believethat a realistic ASP for the project would be around $1,200 psf, implying that SingLand may still make lossof about $30m from the project.

Both the office and hospitality sectors are likely to remain muted in the near-term, before recovering. At thecurrent price, valuations are not compelling. We are maintaining our HOLD recommendation, with a targetprice of $5.57 at a 30%-discount to its RNAV.

Sponsored Links

Singapore Land: Core earnings in line

Operational earnings in line with estimates. Singland reported a 2Q09 net loss of $344.7m due to a $492.1m devaluation haircut (-9%) from its investment properties. As a result, book NAV declined to $8.59/share. Excluding this, core earnings would have grown by 16% yoy to $51m thanks to higher rental and associate income, which more than offset lower hotel and carpark contributions.

Office rentals still reverting positively. Rental revenue continued to improve yoy to $63.6m as current rents are still above preceeding levels while lower operating expenses provided another bottomline-boosting impact. This more than made up for lower hotel contributions, -33.1% yoy to $20.6m, largely from Pan Pacific Singapore, which was adversely affected by lower Revpar and F&B revenue. Associate income also enjoyed the impact of progressive billings from ongoing projects such as One Amber and Sixth Avenue Residences, which offset the income vacuum from Marina Mandarin and Mandarin Oriental Hotels.

The office segment appears to have stabilized, with a moderation in decline of rental rates. However, outlook remains uncertain due to the large incoming supply. The recovery in the residential segment would enable the group to generate positive returns from its Himiko Court enbloc parcel, with an estimated breakeven cost of $1200-1300psf while the anticipated recovery in the hospitality industry should lead to positive Revpar growth.

Approximately 80% of Singland’s RNAV is derived from office assets. Singland’s share price appears to have priced in the deflation in office market, at an implied c$1100psf of office space. However, near term catalyst remains lacking. Our target price of $5.01 is premised on a 30% discount to RNAV of $7.16, in line with its long-term average discount to asset backing.

Singapore Land - Revaluation deficits and likely write-down at Trizon

While Singapore reported a real GDP decline of 10.1% y-y in 1Q09, the rate was cushioned by inventory rebuild, which added 4.6pp to growth. More important, domestic final demand and net exports together subtracted a hefty 14.7pp from GDP, even more than the 13.1pp drain off 4Q08 GDP. The slowing domestic economy has resulted in a faster-than-expected contraction in net demand. Over the past six quarters, net demand in the Singapore CBD has contracted by 813,008 sf, with a 1Q09 net contraction of 558,418sf. As demand is weaker than expected, we maintain our bearish expectations for office rents, expecting them to fall 57% over the cycle.

Capital values since the market peak, according to JLL, have fallen by 27.6%, and further downside is likely given the slide in rents. Recent transaction and valuation evidence in Singapore suggests that office values are down by around 35% since the peak. Indeed, Anson House was reportedly sold in recent weeks for S$85mn (equivalent to S$1,100/psf), down from the S$129.5mn (S$1,701/psf) achieved in 4Q07, a fall of 34.4%. Similarly, Parakou Building recently sold for a reported S$81.4mn (S$1,280/psf), down from S$128mn achieved in 2Q07, a fall of 36.4%. In its recent 1Q09 results announcement, Fraser Commercial Trust flagged a revised valuation of its Keypoint office building at S$294mn (S$941/psf), versus its acquisition price of S$370mn in 4Q07 (S$1,186/psf), a fall of 20.5%. On 22 May, CapitaCommercial Trust flagged a revaluation of its portfolio, with key assets in the portfolio down by up to 18% since the June 2008 peak.

Notable revaluations in CCT’s portfolio included Starhub Centre (down 18.4%), 6 Battery Road (down 17.9%) and Capital Tower (down 11.9%). Given the movements in the market, Singapore Land faces reassessment of its asset valuations, as well. On our numbers, we value its investment portfolio at S$2.9bn versus an end-FY08 book value of S$4.4bn, implying the potential for the booking of a revaluation deficit of S$1.5bn, a fall of 34.9%.

We have broadly maintained our core earnings assumptions since our last note on Singapore Land, although our more positive assessment of the China residential market results in a slight bump up in earnings from its Chengdu project. We have rolled forward our intrinsic SOTP NAV to FY10F to derive a value of S$7.45/share. Not withstanding the market’s recent appetite for risk, we see further downside risks to asset prices and, consequently, to earnings. Thus, we applied mid-cycle discounts to the NAV to derive our FY10F price target of S$4.74/share.