SINGAPORE (Aug 6): DBS is reiterating its “fully valued” recommendation on construction and property group Chip Eng Seng (CES), with a target price of 75 cents.

This came following the group announcing that it has turned over earnings of $11.1 million in 2Q18, compared to a loss of $2.56 million in 2Q17 post restatement.

This brings 1H18 earnings to $17.2 million, 181.9% higher than $6.09 million a year ago.

Revenue for the quarter was 16.3% higher y-o-y at $247.8 million, mainly attributable to increased contributions from its Property Developments and Hospitality segments, but partially offset by a decrease in revenue from its Construction and Property Investments & Others segments.

The group’s Property Developments segment saw its revenue increase by 40.5% y-o-y during the quarter to $188.6 million, due to the progressive recognition of High Park Residences, Grandeur Park Residences and Williamsons Estate.

Meanwhile, Construction revenue fell mainly due to lower revenue recognised from the two Bidadari projects which were in early stage of construction and from Tampines N6C1A/1B and Woodlands N1C26 & N1C27, as they were reaching completion.

The Hospitality division saw revenue increase by 114.7% y-o-y to $15.3 million due to contribution from the group’s island resort in Maldives, Grand Park Kodhipparu Resort. Overall topline was also boosted by contribution from two newly acquired hotels in Australia, The Sebel Mandurah and Mercure & Ibis Styles Grosvenor Hotel.

Revenue from the group’s Property Investments fell 35.2% to $1.9 million due to the absence of contribution from 420 St Kilda Road which was divested in Aug 2017.

In a Monday report, analyst Carmen Tay says, “We note that the proportion of recurring revenue streams has increased to 6.9% (2Q18) from 4.7% (2Q17) – notwithstanding the significant boost in associate contributions post the successful acquisition of a 50% stake in a New Zealand office tower in Aug 2017.”

On the other hand, the analyst believes that the group’s proposed Education venture may unlock a new recurring income stream over the medium term, but this is not without risk.

Most recently, CES acquired a 70% stake in While Lodge Education Group, which operates a chain of pre-school centres in Singapore and Malaysia, for a consideration of $13.3 million, while the group will fund through its internal cash resources.

“We understand that CES has yet to identify firm targets for the introduction of its Childcare facilities but is inclined to open a Repton-branded kindergarten within 18 months of entering into the collaborative agreement,” says Tay.

Typically, childcare operators take about 18-24 months to breakeven, this the analyst believes that it will take time before this segment contributes to bottom-line.

Capex for start-up related expenses are also expected to kick in. Pending further clarity on CES’ approach to growing its Education business, the analyst has yet to factor in contributions or capex from this segment.

As at 4.10pm, shares in Chip Eng Seng are trading 1.5 cents higher at 81 cents or 0.6 times FY18 book with a dividend yield of 5.0%.

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