SINGAPORE (Dec 14): Maybank Kim Eng Research is initiating coverage on Bukit Sembawang Estates at “buy” with a target price of $8.25, at a 20% discount to the research house’s RNAV of $10.31, on expectations of a cyclical earnings rebound in FY19/20E to reverse its earnings contractions over the past six years.

In a Wednesday report, analyst Derrick Heng identifies the stock as a concentrated proxy for Singapore’s residential market which he believes is at an inflection point after four years of price falls.

In his view, Bukit Sembawang is now attractively priced at a 42% discount to RNAV, which is significantly larger than the 14% trading discounts of the stock’s large-cap peers despite its prospects of stronger returns – and hence “excessive” considering the group’s net cash of $236 million and FY19E ROE of 14%.

“With stronger home-buying sentiment depleting unsold inventories in the market, we see scope for developers to raise home prices in 2018. And with 1.1 m sq ft of properties under development, we believe Bukit Sembawang can immediately capitalise on improving market conditions. In particular, we believe a successful launch of 8 St Thomas is a potential catalyst to watch,” says Heng.

The analyst also estimates that Bukit Sembawang’s currently-owned plots of legacy land have the potential to yield an estimated 1.1 million sq ft of saleable area, which could in future provide a pipeline that could last for decades.

“These land parcels are increasingly valuable and appealing considering an environment of elevated land prices. While most developers are under pressure to bid aggressively to secure new development sites, we believe Bukit Sembawang is not compelled to do so. Although its land parcels could be worth almost $1 billion today on our estimates, the market appears to have priced them at zero value,” explains Heng.

“While poor corporate access, low stock liquidity and the long time needed to fully develop its legacy land are possible reasons to overlook this stock, we believe its attractive valuations more than compensate for these,” he concludes.

As at 10.09am, shares in Bukit Sembawang are trading 2.7% higher at $6.09, or 52.99 times FY18E core P/E.