• Perennial Real Estate Holdings’ FY18 net profit fell 22% y-o-y mainly due to absence of one-off gain and lower fair value gains. 
• FY18 EBIT (ex-gains) halved mainly due to loss of income from the divestment and higher opening costs. 
• Revitalisation of Capitol to drive Singapore assets. 
• Lower DPS of 0.4 Sct in FY18 vs 1 Sct in FY17. 

Trading at 0.4x P/BV; Maintain BUY

• We maintain our BUY rating on PERENNIAL REAL ESTATE HOLDINGS (SGX:40S) with a Target Price of S$0.83 based on 55% discount to our RNAV.
• The stock currently trades at 0.4x P/BV, offering massive upside as it gradually realises its RNAV potential.

Where We Differ

• Unlocking development value from strategically located land bank with partial exposure to healthcare. We are one of two brokers that cover Perennial Real Estate Holdings. (See Perennial Real Estate Holdings analyst reports)
• Perennial Real Estate Holdings’ hidden gems are its vast integrated projects in strategic locations across the main transportation hubs in China though these have lengthy gestation periods.
• Apart from property, Perennial Real Estate Holdings has built a portfolio of medical and healthcare services to leverage on rising healthcare demand in China and Singapore.

Potential Catalysts

• Strata/en-bloc sales, divestment of assets, building recurring income through healthcare hub and business.

FY18 Results Supported by Fair Value Gains

• Perennial Real Estate Holdings' FY18 net profit fell 22% y-o-y to S$78m, mainly due to absence of a one-off divestment gain and higher net interest expenses, partially offset by fair value gains. FY18 EBIT (ex-fair value gains) fell to S$43m (S$90m in FY17) mainly due to the absence of one-off divestment gains and higher opening costs.
• The key highlights of the results:
  1. expect to relaunch Eden Residences Capitol soon;
  2. the potential relocation of Beijing government offices to Tongzhou bodes well for potential en bloc; and
  3. divesting its entire 20% stake in Shenzhen Aidigong.

Valuation

• Our Target Price to S$0.83 is based on a 55% discount to RNAV of S$1.85.
• The discount is to factor in potential execution risks and long development/gestation periods. We have assumed marginal contribution from its new healthcare venture.

Key Risks to Our View

• Negative changes to property rules in China and exposure to RMB currency fluctuations as Perennial Real Estate Holdings owns a large land bank in China. Further deterioration in operating cashflows, coupled with high interest cost, may impact interest cover.

What's New - Capital in the Capitol

FY18 net profit supported by fair value gains.

• Perennial Real Estate Holdings’ FY18 net profit fell 22% y-o-y to S$78m, mainly due to absence of a one-off divestment gain (S$56m) from the sale of TripleOne Somerset and gain on bargain purchase of S$25.9m arising from the UEL transaction in FY17, and higher net finance costs (+71% y-o-y). This was mitigated by
  1. fair value gains recognised in 4Q18 including S$38.5m (from Xi’an North HSR Plot 4 and Perennial Qinyang Mall) and Chinatown Point (estimated to be around S$24m), and
  2. S$271m recognised in 9M18 from the valuation of two plots on Beijing Tongzhou Integrated Development Phase 1 following the receipt of construction permits (S$241.9m) and from the revaluation of Perennial International Health and Medical Hub (PIHMH) (S$28.7m).
• FY18 EBIT (ex-fair value gains) is estimated to have decreased to S$43m from S$90m in FY17 mainly due to the loss of contributions from the divestment of TripleOne Somerset, lower gross profits (-37%; gross margins of 39% in FY18 vs 65% in FY17) mainly from higher opening costs of Perennial International Health and Medical Hub (PIHMH) and The Capitol Kempinski Hotel, and marketing and promotional expenses to relaunch Eden Residences in Capitol.
• FY18 revenue grew 5% y-o-y largely attributable to the consolidation of revenue from Capitol Singapore (acquired the remaining 50% stake) and PIHMH.
• 4Q18 net profit fell 42% y-o-y to S$16m mainly due to net finance costs which more than doubled y-o-y, mitigated by higher revenue (+44% y-o-y) and fair value gains. The higher interest expense (+136% y-o-y) from higher borrowings was due to the consolidation of Capitol Singapore and interest costs on PIHMH now recognised post completion.
• In 4Q18, Perennial Real Estate Holdings’ revenue grew +44% y-o-y, largely led by its Singapore assets (+12% y-o-y) mainly from consolidation of Capitol Singapore, and its China assets (+25% y-o-y) mainly from revenue contributions following the opening of PIHMH in 2Q18 and better performance recorded by Perennial Qinyang Mall and Perennial Jihua Mall.
• Singapore and China remain its two largest markets. Singapore contributed 29% and 39% in revenue and EBIT (ex-fair value gains) respectively, while China contributed 53% and 37% respectively in FY18.
• As at 4Q18, Perennial Real Estate Holdings’ net debt-to-equity stood at 0.72x (vs 0.57x in 4Q17) with an average interest cost of 3.8% (unchanged from December 2017).
• Total debt-weighted average term to expiry has reduced to 1.9 years from 2.2 years as at December 2017. The debt expiry of Perennial Real Estate Holdings in 2019, 2020 and 2021 are S$762m, S$685m and S$1,035m of which there is another tranche of retail bonds amounting to S$280m expiring in 2020.
• Majority of the debt expiring in 2019 are mainly secured loans of S$227m on Singapore assets which the management is confident of rolling forward. Management is currently in talks with the banks and is confident it can renew the S$125m MTN
• Declared a lower dividend per share of 0.4 Sct in FY18 vs 1 Sct in FY17.

Updates on Major Projects

TripleOne Somerset's retail podium to commence in March 2019 and AXA Tower's committed occupancy rose further to 93% from 92% in 2Q18.

• TripleOne Somerset: The retail podium obtained TOP in January 2019 and is expected to commence operations from March 2019. Tenants include anchor tenant NTUC Finest which is setting up its wellness-oriented outlet, returning tenants and new tenants including Sindy Durian, Maison Kayser, 328 Katong Laksa and Kara-men Ajisen.
• AXA Tower: Total committed occupancy continued to creep up to 93% from 92% in 3Q18 (88.8% in FY17). Management continues to explore en-bloc sale opportunities.

The Capitol Kempinski Hotel has achieved 50% occupancy, expect to relaunch Eden Residences Capitol soon.

• After six months since The Capitol Kempinski Hotel began operations, management says that the hotel has hit 50% occupancy with ADR of S$500 per night. The retail repositioning exercise continues with new retail concept. IWG's working space concept No18 is expected to open in 3Q19. Management expects the repositioning exercise to complete by mid-2019.
• In addition, Perennial Real Estate Holdings is preparing for the relaunch of the 39-unit Eden Residences soon, targeting Chinese buyers. To-date, 16 units have been sold at an ASP of S$3,000 psf. Management believes The Capitol development should be able to achieve yield comparable to the market at 4- 5% in a couple of years, given the changes and refurbishments it has made since it took over the asset.

Chengdu HSR Integrated Development.

• Perennial International Health and Medical Hub (PIHMH) in Chengdu was officially opened on 1 June 2018. Committed occupancy stood at 91% as at December 2018. Most medical/healthcare-related mini-anchor tenants have commenced operations while anchor tenant, Gleneagles Chengdu Hospital is expected to begin operations in 2H19.

Beijing Tongzhou Integrated Development.

• In January 2019, China’s State Council approved the development plan for Tongzhou as the sub-centre to drive regional growth and key functions of the Beijing Government, universities and hospitals are expected to move to Tongzhou. Four key government departments have officially moved to Tongzhou. This bodes well for Perennial Real Estate Holdings’ development especially potential en-bloc sale of one of its office building. Target completions for Phases 1 and 2 begins progressively from 2023 and 2022.

Xi’an North HSR Integrated Development.

• The construction of Xi’an North HSR project is progressing well with target completions in 2022 and 2023 for plots 4 and 5 respectively.

Two new HSR Integrated Developments – Tianjin South and Kunming South.

• Perennial Real Estate Holdings obtained two new HSR Integrated Development contracts; Tianjin South in July 2018 and Kunming South in December 2018. These serves as potential pipeline for its medical hub HSR integrated development after Chengdu and Xi’an. This is in line with Perennial Real Estate Holdings’ target of obtaining 6-8 HSR Integrated Development projects to be funded by its Healthcare Fund.

Healthcare segment – targets to open four new eldercare and retirement homes; divesting its entire 20% stake in Shenzhen Aidigong.

• In FY18, Renshoutang opened three new facilities with 2,200 new beds. As at 4Q18, the total number of operational beds stood at 5,927 vs 3,577 as at December 2017. It currently has a committed pipeline of 9,650 beds and potential pipeline of more than 13,500 beds. It targets to open four new facilities in 1H19 which is expected to add more than 1,900 new beds to its portfolio.
• In January 2019, Perennial Real Estate Holdings announced that it will be divesting its entire 20% stake in Shenzhen Aidigong Modern Maternal and Child Health Management for RMB200.7m (S$39.82m) to one of its existing shareholders of Aidigong, Guangdong Common Splendour Health Industry Group Limited. The proposed disposal came in line with the founder, Chairman and largest shareholder of Aidigong, Ms Zhu Yufei disposing her entire stake to the buyer concurrently. The price implies a valuation of 18x FY18E PE. Perennial Real Estate Holdings acquired its 20% stake in 2016 for RMB135.4m (S$28.7m) at 11x FY16 PE.
• Albeit small, we believe the divestment could alleviate Perennial Real Estate Holdings’ cashflow requirements in the short term.

Maintain BUY; Target Price of S$0.83

• We maintain our BUY rating and Target Price of S$0.83 on a 55% discount to RNAV of S$1.85. We continue to expect near-term earnings to be driven by divestment/fair value gains.
• We remain positive on its medium-to long-term development plans especially as its investments in China (and its healthcare hub) slowly come to fruition despite potential near-term financial risks. We believe the strength of its stakeholders (79% owned by its four key sponsors including WILMAR INTERNATIONAL LIMITED (SGX:F34)’s Mr Kuok, OSIM’s Mr Ron Sim and CEO Mr Pua, and partners and key management team) plays an integral role to execute and mitigate potential financial risks.

Source: DBS Research - 14 Feb 2019