Investor meeting feedback
We hosted a series of investor meetings for FCL post its 1Q14 results. Expectedly, the meetings focused on strategy, capital allocation and potential corporate actions rather than on numbers. The burning question on the minds of investors is when or whether its Thai shareholders will place out shares to increase free float. This remains an uncertainty and out of management’s control. However, FCL plans to continue to execute in Singapore, go deeper into its core markets in Australia and China and improve earnings quality. We keep our estimates and target price (30% RNAV discount) and Add rating.
In a series of investor meetings, CFO Mr Chia Khong Shoong reiterated FCL’s strategy to allocate more capital to its core overseas markets, particularly Australia (Sydney and Perth). FCL believes it needs to balance development and recurring income and aim for more mixed developments. China is a core overseas market, though any investments will be more measured, likely with local partners and focused on its core cities in Suzhou and Shanghai. FCL says it is natural for it to venture into Thailand in the longer term given TCC’s dominant position. However, management downplayed the possibility of this becoming a core market as the dollar value potential remains small. For now, FCL plans to gain access to the Thailand market via asset management and serviced apartments. In Singapore, the approach is to adopt a fast-churn model and treat housing stock like raw materials, while it evaluates how best to revitalise its commercial property portfolio. FCL thinks now is not the ideal time to redevelop Centrepoint and Starhub Centre, although this remains on the cards. FCL says having a hospitality REIT will complete its asset-light initiative, but is in no rush to divest.
What We Think
When or whether FCL’s Thai shareholders will place out vendor shares is beyond FCL’s control, an issue management is not at liberty to comment on too much. We think this event is just a matter of time. We appreciate management’s plan to stay disciplined in its acquisition strategy and deliver stable returns to shareholders. The 121% yoy rise in core profits and S$3bn of unbooked presales in 1Q14 demonstrates its execution track record. At 0.6x P/BV and 52% discount to RNAV, we think valuations are very attractive.
What You Should Do
We maintain our Add rating with unchanged estimates.
1Q14 results review
Development PBIT up 121% yoy, S$3bn yet to be recognized. FCL’s 1Q14 core net profit was in line with expectations at 26% of our FY14 estimate. The strong set of 1Q14 results showed yoy gains in all segments. Overseas development was the key driver and is expected to remain so in FY14, backed by strong sales
Overall 1Q14 core net profit rose 75% yoy, driven by the strong overseas development sales. Development PBIT rose 121% yoy. Australia was the key driver for the quarter, with the completion of One Central Park (CP) and Park Lane Block 5A in Sydney. FCL was able to raise ASPs in Australia given the buoyant market.We expect the Australian sales to remain a key earnings driver in 2Q-3Q14.
As for China, around 700 units were sold in 1Q14 (Suzhou Baitang project and Gemdale Mega City). ASPs for the Gemdale Megacity project was higher than expected, but the overall residential market remains cautious in China. Overall ASPs remain flat in the quarter.
In Singapore, development revenue declined by 18% yoy as most of FCL’s inventory has already been sold. Total unbooked presales stood at a robust S$3bn at end-1Q14, with S$2.1bn from Singapore, S$0.8bn from Australia and S$0.1bn from China.
Higher commercial rents and room rates Investment property revenue rose 12% yoy due to the higher contribution from One@Changi City and rental rates. Its commercial portfolio is at full occupancy. The development of Waterway Point is on track to completion in 2015.
The hospitality segment’s revenue rose 18% yoy due to higher rates and occupancy. FCL signed a further 927 apartments under management in the quarter with around 8.1k apartments pending openings. These are expected to progressively start operations from 2016 onwards.
Asset recycling. Recent media reports suggest that FCL will launch a hospitality trust, which could raise c.S$600m. This would be a re-rating catalyst but it remains uncertain given the current market conditions. FCL’s current valuation is at a depressed level of 0.6x FY14 P/BV (1Q14 book value of S$2.15). Including the potential sale of Changi City Point and One@Changi, we believe that FCL could recycle assets of around S$1bn in 2014. This would fund potential new acquisitions and/or initiatives to revitalise its commercial property portfolio.