Fraser & Neave

Kim Eng on 8 Mar 2012

Upgrade to Buy. Singapore’s mass market residential property market has proven resilient, as evidenced by the January private home sales data released by the Urban Redevelopment Authority. Developer sales in the coming months are expected to still remain strong. Fraser and Neave (F&N) is thus in a sweet spot as a healthy take-up rate of its mass market projects will provide a secure earnings stream in the next three years. We upgrade our recommendation to Buy with the target price raised to $7.55.

In the right segment. We estimate property development to account for about a quarter of F&N’s group pre-tax profit for FY Sep12F. Singapore will be the key contributor, making up 50% of development sales, with Australia and China contributing the remainder. F&N’s development earnings are secure for the next three years as its pre-sold projects in Singapore carry unrecognised revenue of $1.4b. In addition, it has a supply of 2,785 unsold private residential units as at the end of last month. We believe that monetary liquidity, low interest rates and healthy demand for mass market projects will help F&N sustain its healthy take-up rates.

China policy loosening could lift sales. F&N has about $600m in unrecognised revenue from its pre-sold units across various projects in China and Australia. It still has about 5,200 units in Australia and 8,200 units in China to be sold over the next 5-8 years. As home prices in major Chinese cities experience a reasonable decline, purchase restrictions imposed by the central government could be lifted in the medium term. If so, this would spur the sales of F&N’s residential units in China.

Capital recycling opportunities abound. Income from F&N’s commercial properties (18% of pre-tax profit) is fuelled by strong occupancy of its 11 non-REIT retail malls (2.2m sq ft) in Singapore, as well as the steadily growing serviced residence portfolio (+7,000 rooms) in Asia Pacific and the Middle East. Its hospitality and retail portfolios provide a pipeline of assets for capital recycling.

Higher target price leads to upgrade. Better-than-expected sales momentum for F&N’s residential property projects and enhanced earnings visibility prompt us to peg our target price at a lower conglomerate discount of 5% to our SOTP valuation. Our target price thus increases to $7.55 from $7.05 previously, which warrants a rating upgrade to Buy.