SINGAPORE (Jan 3): Property developers offer good value at 0.8x P/NAV (-1 standard deviation) in an environment of high valuations, according to DBS Group Research.

“With the property market expected to remain resilient and developers under our coverage have been actively clearing inventories in 2019, we see dissipating risks to their exposure to Singapore (SG) residential market which we estimate to drop to less than 15% of RNAV based on unsold inventories,” said lead analyst Derek Tan in a Thursday report.

Furthermore, most developers were seen in 2019 to have gone on a mergers and acquisitions (M&A) spree, with more than $17 billion deals inked. Tan believes that these M&A deals would shore up earnings and further enhance geographical diversity, and in some cases add incremental recurring income.

“We anticipate an improvement in ROEs while asset recycling activities will drive NAV upside,” he adds.

On the back of this, DBS top “buy” picks for this sector are CapitaLand, City Developments and UOL Group.

  1. CapitaLand

DBS has raised its target price on CapitaLand to $4.50 from $4.00, previously, pegged to 18% discount to revalued net asset value (RNAV) of $5.44.

“With the CapitaLand and Ascendas-Singbridge (ASB) merger completed, 2020 will herald a new era of growth with a renewed focus in establishing dominance in key markets of Singapore and China while looking at opportunities to deploy capital in growth markets of India and Vietnam,” says Tan.

Meanwhile, CapitaLand’s management has shown fast execution on its asset recycling strategy and the analyst believes that China, Japan and Singapore are on the cards in 2020. In terms of capital deployment, India, Vietnam and China are showing good prospects.

In Singapore, the group is relooking potential redevelopment opportunities for its Science Park assets, which Tan believes will be NAV-enhancing in the medium term.

  1. City Developments
Positives on City Developments include the property market that is on firm footing and catalysts from NAV upside driven by potential ongoing enhancement of its Millennium & Copthorne (M&C) Hotels (M&C) assets; building up its fund management business through the launch of new platforms (real estate investment trusts (REITs), funds) and; better-than-expected sell-through rates especially in the luxury market.

In a Thursday report, analyst Rachel Tan says, “9M19 earnings fell marginally but we see positives from strategic plans to grow its recurring income and NAVs in the medium term.”

Currently, the group is looking into redeveloping Liang Court into a new mixed use development; planned recycling of capital from the proposed sale of W hotel to CDL Hospitality Trusts; and successful privatisation of M&C which would anchor medium term NAV growth.

DBS has increased its target price on City Developments to $13.00 from $11.00.

  1. UOL Group

According to Rachel Tan, this stock offers good value at 0.7 times P/NAV and can potentially trade closer to its NAV if it unlocks value from its commercial and hospitality assets.

Following UOL’s tighter grip on United Industrial Corporation (UIC) (50% stake) and control of Marina Centre Holdings (MCH), UOL now has control over a prime integrated development comprising a retail mall and 3 hotels fronting the Marina Bay area. With that, the analyst awaits for the group to unveil its redevelopment plans, which she believes includes residential components, for the site to unlock value.

“With key commercial assets located at and the fringes of the central business district (CBD), we believe that UOL is well positioned to gain from asset enhancement initiatives (AEI)/redevelopment potential riding on the government’s plan to rejuvenate the CBD,” she adds.DBS has increased its target price on UOL to $9.50 from $8.53 previously.