• 2Q16 PATMI down 55%
• Weaker versus expectations
• Exacerbated by absence of FV gains

2Q16 results somewhat softer than expected

2Q16 PATMI decreased 55% YoY to S$68.8m mainly due to lower gross margins, business acquisition costs (S$10.8m) related to 110 High Holborn in London, UK and also fair value losses (S$19.6m) on investment properties compared to fair value gains of S$60.3m recognized in the same period last year. In terms of the top line, 2Q16 revenues rose 6% YoY to S$363.6m from higher progressive recognition from property developments (Riverbank@Fernvale, 70 St. Patrick’s, Botanique at Bartley and Principal Garden), and also higher contributions from the group’s hotel operations.

After accounting for one-time items, we find 2Q16 results to be somewhat below consensus and our expectations, and we tweak our FY16F and FY17F PATMI forecasts down by 17% and 20% to S$328.2m and S$280.0m, respectively.

Fair value dips marginally to S$7.30; maintain BUY

Management indicates that most of their launches have achieved good sales but are concerned that land-banking at reasonable prices remain difficult, given intense competition and the lack of confirmed sales in the government land sales supply. The group expects to expand the footprint of its hospitality segment and will complete the extension of rooms at the ParkRoyal Parramatta in Sydney to 268 rooms, and has also signed a hotel management agreement for a Pan Pacific hotel in Beijing, China.

Looking ahead, management sees a muted 2H16 outlook for office rentals due to an over-supply situation and also expects retail rents to be impacted by weak retail sales and competition. As we incorporate softer assumptions into our valuation model, our fair value estimate dips marginally to S$7.30, down from S$7.43 previously. Maintain BUY.  

Source: OCBC Research - 5 Aug 2016