Investment Merits

• More than 30 years of successful track record in public and private housing.
• It can keep construction cost lower than other developers, by virtue of the fact that it is a main contractor itself. Translates into lower breakeven cost.
• $548m construction order book, which could be replenished given that BCA expects overall strong construction demand of $31-38 billion this year.
• Alexandra Central strata retail mall is 98% sold. Lump sum profit recognition upon Q4 2014 TOP, amounting to estimated $152m (30% market cap). Park Hotel Alexandra adds another $139m revaluation surplus when completed.
• Belvia, Junction Nine substantially sold. Fulcrum@Fort Road is only 18% sold, but unlikely to require write-down as its breakeven is substantially below ASP.
• Management owns 30% CES, and appears to be savvy at capital deployment.
• Repurchased 25.1m shares since the start of 2012, at average cost of $0.64.
• 4-cent annual dividend appears to be sustainable for next 3 years, based on development pipeline and recurring income from its investment properties.

Perceived Risks

• Fewer construction jobs going forward, likely depressing segment margins.
• Development pipeline in Singapore appears to be drying up beyond 2016. CES recently won a state tender for two plots of land in Fernvale that can be developed into combined 1.1m sqft GFA residential, although that is likely for purpose of keeping its construction arm occupied rather than profit-driven.
• CES share price might not react dramatically to Alexandra Central TOP in Q4 2014, if expectations of lump sum profit are already baked into its share price.
• Currency and regulatory risks associated with Australia, Malaysia.

Investment Actions

We initiate a TRADING BUY recommendation on Chip Eng Seng at $0.83 with 12-month target price of $1.03, representing 29% upside inclusive of 4-cent dividend.

This reflects 637m issued and outstanding shares (excluding treasury shares), and doesn’t reflect further share buybacks that would likely be value accretive.

Source: Phillip Securities Research - 13 Aug 2014