SINGAPORE (Mar 13): CIMB views Perennial Real Estate's purchase of the remaining 50% stake in The Capitol Singapore from Chesham Properties as a big positive.
This "signals the resolution of the deadlock on the project and progress can now be made to unlock value and returns from this iconic development," says CIMB analyst Lock Mun Yee in a Monday report.
Perennial Real Estate announced it will purchase the remaining 50% stake in The Capitol Singapore from Chesham Properties for $129.6 million, based on a property value of $1.028 billion, 2.6% above the Dec 17 valuation.
See: Perennial buys out partner to take full control of Capitol project
Post transaction, Perennial Real Estate will own 100% of the project and will take over existing loans of $368.6 million plus accrued interest and make ancillary payments of $3 million to Patina Hotels & Resorts. The Capitol Singapore comprises Eden Residences Capitol, 157 hotel rooms, retail and theatre components.
Perennial Real Estate intends to finance this acquisition via cash and debt. Factoring this outlay and consolidating Capitol’s debt, CIMB estimates Perennial Real Estate's net debt-to-equity ratio could increase from 0.58 times as of 4Q17 to 0.7-0.8 times.
More importantly, Lock thinks once the project becomes fully operational, it can generate $40 million-$50 million of recurrent income annually.
Based on URA statistics, CIMB says there were 23 unsold apartments as at end-4Q17 that can be monetised in the current rising residential market.
"We believe the retail component is under-rented, based on our estimates of a low double-digit rate. The hotel component was completed in 4Q15 but has yet to commence operations. Hence, we anticipate potential earnings upside when the property is fully ramped up in the medium term," says Lock.
CIMB's RNAV estimate is raised by 5% to $1.97, assuming a 4.5-5% cap rate for the various property components. Based on the property value of $1.03 billion, teh house reckons the completed non-residential GFA could be valued at $1,767 psf, which appears to be below replacement cost based on recent transacted land values such as the $1,706 psf and $1,689 psf GFA paid by Guocoland and IOI Properties for the Beach Rd commercial site and white site at Central Boulevard respectively.
CIMB is lowering its FY18F EPS by 95% to take into account additional interest costs for the acquisition and lag time to ramp up the property performance. Our FY19-20F EPS is raised by 2-18% to factor in the additional income post consolidation and better asset performance.
"Maintain our 'add' rating with a slightly higher target price of $1.18, pegged to a 40% discount to RNAV," concludes Lock.
As at 11.55am, shares in Perennial are up 1 cent at 87 cents or 174 times FY19 core earnings.
