HAFARY HOLDINGS

UOBKayhian on 29 Nov 2013

Optimistic outlook, sleeker operations and a crown jewel asset
Maintain BUY and target price of S$0.33. Hafary’s status as Singapore’s leading tile supplier suggests that it will be a major beneficiary of the increasing housing in Singapore, as it has been a key tile supplier to the HDB BTO programme in FY13. Its newly-completed headquarters (HQ) at 105 Eunos Ave 3, could also potentially be its next crown jewel, due to its close proximity to the upcoming Paya Lebar Commercial Hub in 2014.

INVESTMENT HIGHLIGHTS

• Market leader and beneficiary of Singapore’s housing boom. Hafary estimates that it has a market share of about 50% of the general segment (eg interior design firms, walk-in customers) and 15% of the project segment (eg HDB, developers). Revenue from the general and project segments saw an impressive CAGR of 21.5% and 38.1% respectively from FY07-13. As the number of housings in Singapore increases, the general market for Hafary is also likely to get bigger as resale flat owners renovate their new homes.
• Earnings boost from new rental income source Hafary recently relocated to its new HQ at 105 Eunos Ave 3. Boasting a net lettable area of 132,000sf, Hafary will be leasing out unutilised floor space of approximately 66,000sf as a new source of income. Based on average recent rental transactions in the vicinity (S$1.80psf) , we expect Hafary to generate additional annual rental income of about S$0.8m (14.0% of Hafary’s FY13 core earnings) based on the 66,000sf. Currently 40,000sf has been leased out.
• Cost savings from streamlined operations. The new warehouse facility at Changi North is also expected to result in huge cost savings for Hafary. In the past, delivery trucks had to stop at three different warehouses to pick up tiles. With the larger warehouse facility, Hafary has housed all its tiles in a singular location, (eg. retail segment tiles at Changi, project segment tiles at Defu) allowing the company to enjoy huge cost savings from reduced manpower and transport costs.
• Crown Jewel Asset. We visited Hafary’s new office at 105 Eunos Ave 3 and believe this newly-completed HQ could be Hafary’s new crown jewel. The new HQ with a remaining tenure of 25 years is strategically located near the future Paya Lebar Commercial Hub, and is a 10-minute walk from Paya Lebar Mrt Station.With the impending TOP of the Paya Lebar Square by 2Q14, fair value of the new HQ is currently worth approximately S$50m according to Hafary’s FY13 annual report, which is S$28.5m (S$0.066/share) in excess of its book value.
• Nothing to lose, only something to gain. Hafary recently took a full impairment of S$4m on its investment in associate, HCCM. After which, no further loss is expected to be recognised from HCCM going forward. While management is optimistic that operations will gradually stablise, they are also open to cashing out of HCCM if a good opportunity arises. As the investment in HCCM has been fully impaired, any proceeds from the possible sale will be recognised as a gain on disposal for Hafary