This is third in the series of our hunt for multi-baggers. For the others in our series, please refer to these links:
- TheBearProwl: Why we think Temasek’s $7.35 Offer for Keppel is a Poor Price
- Genting is Undervalued: Short Term Pain, Long Term Gain
Perennial Real Estate Holdings Limited (PREH SP) (SGX: 40S)- Integrating into the future core transport infrastructure landscape of PRC.
MTN – A medium-term note is a debt note that usually matures in 5–10 years, but the term may be less than one year or as long as 100 years. They can be issued on a fixed or floating coupon basis.
HSR – Health Services Research
Perennial Real Estate Holdings Limited (“Perennial”) is an integrated real estate and healthcare company headquartered and listed in Singapore.
As a real estate owner, developer and manager, Perennial focuses strategically on large-scale mixed-use developments and has a presence in China, Singapore, Malaysia, Indonesia, Myanmar and Ghana with a combined portfolio spanning over 65 million square feet in gross floor area.
Perennial is also a healthcare services owner, operator and provider in China with two core business segments, being 1) hospitals & medical centres as well as 2) eldercare and senior housing.
In China, Perennial is a dominant commercial developer with large-scale mixed-use integrated developments.
Four of Perennial’s developments, 1) Chengdu East High-Speed Railway (“HSR”) Integrated Development, 2) Xi’an North HSR Integrated Development, 3) Tianjin South HSR Integrated Development and 4) Kunming South HSR Integrated Development, are regional healthcare and commercial hubs which are situated adjacent to four of the country’s largest HSR stations and incorporate medical, healthcare and eldercare facilities.
Other notable projects in Perennial’s portfolio include;
- Beijing Tongzhou Integrated Development
- Shenyang Longemont Integrated Development
- Zhuhai Hengqin Integrated Development
- Perennial Jihua Mall in Foshan
- Perennial Qingyang Mall in Chengdu
In Singapore, Perennial has invested in and/or manages prime iconic properties located in the Civic District, Central Business District and Orchard Road precinct, such as Capitol Singapore, CHIJMES, AXA Tower, 111 Somerset, Chinatown Point and House of Tan Yeok Nee.
2. Brief review of financials
Year to date. 3Q19, Perennial recorded increased revenues of $91m and a core operating activities profit of $15.8m.
Share of results from associates/JV increased to $45.6m and net finance costs of $93.8m led to a nett loss of $34.5m.
The net loss translates into a loss per share of 2.09cents and a NAV of $1.57. PREH also recorded translation losses due to the weakening of the RMB.
Revenue increased YoY due to the higher contribution from Capitol Singapore and PIHMH, however, the increase in finance costs and administrative expenses were higher than the revenue contribution. Increase in share of results of associates and joint ventures was mainly due to the gain on divestment of Chinatown Point in 2Q 2019. In addition, 111 Somerset and the healthcare associates and joint ventures reported improved results this quarter. 111 Somerset was also able to sell 39 strata-sale office and medical units in 3Q and October 2019 with gross sales totaling about S$102 million.
The balance sheet and key financial ratios were largely unchanged from FY18, with changes mainly arising from working capital movements. The proceeds arising from disposal of stakes in Aidigong and Chinatown point mall were reinvested into its other joint ventures by way of the provision of loan funding.
3. Investment thesis
(i) Corporate profile and vision
As a real estate owner, developer and manager, PREH focuses strategically on large-scale mixed-use regional healthcare and commercial developments. The Company intends to not only own and develop the site, but also build up capabilities to provide certain services and amenities. To this note, PREH is currently a healthcare services owner, operator and provider in China with two core business segments, being hospitals and medical centres as well as eldercare and senior housing.
PREH has identified a few secular trends and have strategically positioned themselves to develop capabilities to exploit these opportunities. The trends are HSR network expansion, Quality healthcare for the aging population; and urbanisation and integration of ASEAN. The capabilities they have developed are capital management, real estate management and healthcare management.
As a listed company, developing capital management capabilities is of exceptional importance so as to mitigate against mismatch of asset/liability duration and also to drive stable return on equity to shareholders. To this note, PREH has demonstrated an ability to secure continued funding, managing liquidity and maintaining flexibility. PREH has also been able to recycle assets to drive shareholder value. PREH also has a medium-term note programme of $2b of which only 20% is outstanding.
(ii) Growth levers
We have attached snapshots of the entire portfolio noting that many of them are not fully operational yet. The delivery of all these projects to completion is the main growth driver for this company.
(iii) Debt profile and funding
PREH has a total of $3b in borrowings on its balance sheet of which $1b is repayable in one year or less. Of the $3b, $1.6b is secured against their investment properties and $0.4b are from its fixed-rate notes. Proportioning for the share attributable to PREH, we have estimated PREH’s share of exposure to be $2b.
We have also estimated another $3.3b of borrowings in its associates and joint ventures of which PREH’s share is estimated to be $1.5b. In total, we estimate PREH’s share of borrowings to be $3.5b and a blended debt to equity ratio of 1.3.
Do note that this is a practical and also overly prudent method of estimating total debt exposure as PREH may be on the hook in the event of a default by its investment partners if they are unable to meet their share of debt obligations. PREH may also have to take on the share of investment which may be favourable in the longer term, but may be an excessive burden in the immediate term.
While there is no doubt that PREH has demonstrated the continued ability to refinance and also to secure funding from its major shareholders and institutions, this is contingent on a few key factors including the timely and successful execution of projects and availability of funding in weakening macroeconomic conditions.
(iv) Suppressed valuation and leverage driving returns on investment
The NAV as at 30/6/19 is S$1.606 which is based on an RMB/SGD rate of around 5.05~5.07. While the RMB may ease in the near term, we are constructive on the longer-term strength of the RMB as China continues its growth as an economic powerhouse underpinned by aa sizeable population.
Based the prevailing exchange rate, we have estimated a conservative RNAV to be S$2. This is derived solely by applying a developer’s margin of 15~20% on to its current asset base. This is conservative as the asset base will enlarge as development profits are recognised or because market value of the asset may appreciate further resulting in a higher fair value upon remeasurement. There are a few risks which we will discuss in the next section which may impede the realisation of the RNAV.
4. Major risk factors to our call
(i) Execution risks
With this many large-scale projects in the pipeline, there is a risk that PREH may not be able to deliver all projects on a timely basis and to the quality required. While they have a proven track record of delivering projects so far, the risk is no doubt present.
(ii) Delays due to macroeconomic headwinds
With the slowing macroeconomic conditions, PREH may be forced to delay the projects due to either company centric or macroeconomic factors.
(iii) Fundamental change or delays in government policies and infrastructure planning
Regulatory interventions in the form of higher taxation or capital expenditure commitment may cause a delay in capital recycling and significantly impact the ROE and growth trajectory of the company.
(iv) Funding risks and risk of RMB depreciation
A significant portion of borrowings was originated in SGD for the projects in PRC and PREH does not hedge foreign currency exposure, therefore there is a significant exposure to currency risk. We think that PREH may manage its repayments via forwards but were not able to verify this information publicly. Interest rate risk is also significant as a large portion of borrowings are on floating rates and a 10bps fluctuation in rates will impact by company’s P&L by at least $2m. However, we note that we are currently moving into a low interest rate environment and are also bullish on the longer-term prospects of the RMB.
(v) Risks with other stakeholders
As PREH has joint venture partners in all its projects, there is a risk of a multitude of issues with its JV partners ranging from disputes to cash flow issues.
(vi) Delist by the substantial shareholder and a potential value trap
With PACC Offshore being delisted at 20% of IPO price after 5 years and PREH sitting at about ~42% of its RTO price, one may have to seriously consider the risk of the substantial shareholders attempting a general offer at a suppressed price. The substantial shareholders are also related and likely to be able to act in concert. Furthermore, they hold a very substantial portion of the total shares.
The share price has largely been 1 way down since the RTO. The NAV per share has not seen meaningful growth in the past 4 years due to subdued profits which were inadequate to mitigate against low currency translation losses. While a general offer is likely to be above the current share price, the timing and price is uncertain and this will impact total returns and also total risk-adjusted returns.
With an impending slowdown in the economy, we think an opportunity may surface to bottom fish a stock that has already underperformed the broader index and peers. The stock is also near its all-time low. However, we note that PREH has an ambitious growth plan and has already secured the sites to achieve its plan.
As the development of the projects will take a few years to complete, we think one can be patient in initiating the investment of this stock. We also think a margin of safety is required to enter this share due to the existing risk factors being flagged.
Entry price: S$0.47-0.50
Project 2025’s intrinsic value: S$2.00 providing 400% returns