DBS Group research analyst Derek Tan is predicting a re-rating of real estate firm Tuan Sing Holdings following the $500 million sale of its Robinson Point property. With most of the proceeds intended for debt servicing, the counter’s potentially lower gearing ratio could see investors taking a second look. 

“Given that at least $290 million of proceeds will be used to pay off borrowings, we estimate that net debt-equity could improve to 0.90 post-deal from the current 1.37. We opine that a key overhang on Tuan Sing’s share price has been its high gearing that resulted in the stock trading at a P/NAV of 0.3, a discount to peers’ average of 0.5,” says Tan. 

He has maintained his “buy” call on the counter with a higher target price of 44 cents from the previous 38 cents.

The sale represents a 33.5% premium to Tuan Sing’s Robinson Point book value of $374.4 million. After using  $294.4 million of the sale to pay off borrowings to that amount, Tan sees the firm potentially using the net proceeds (before transaction fees but after repayment of borrowings) of $128.3 million to repay the Group’s other borrowings and fund projects such as Batam Opus Bay and the Hyatt Regency Perth AEI. The additional cash could also help fortify the firm’s cash flow amid Covid-19 pressures. 

These pressures have been particularly acute in Tuan Sing’s Australia hotel and property business. 1H2020 revenue came in 39.3% lower y-o-y at $91.9 million, with hotels recording a 58.1% decline in revenue and net loss of $6.4 million following lower occupancies due to lockdown measures and travel restrictions. 

Tuan Sing’s industrial services segment -- traditionally a low margin sector -- saw a 71.7% fall in revenue to $14.8 million on lower sales volume and logistics for commodity trading though segmental profit rose by around $0.4 million. Other investments, driven by its printed circuit board (PCB) manufacturing arm Gultech outpaced expectations to record a 35.1% y-o-y increase in segmental profit to $14.2 million. 

Still, the firm has shown resilience during this difficult period. The Group’s overall net profit for 1H2020 came in at $6.6million -- a reversal from the $0.5 million loss it experienced in 1H2019. Around 96% of Tuan Sing’s loans are secured, with $278.7 million repayable in a year or on demand.

“Data storage demand, which partially drove GulTech’s 1H20 growth, is expected to remain robust into 2021 especially given Micron’s positive guidance for 3Q20. World Semiconductor Trade Statistics forecasts net billings for memory integrated circuits to grow 15% yo-y in 2020 vis-a-vis  5.3% y-o-y growth for all integrated circuits,” notes Tan. He has revised segmental profit upwards by 9% before tax and fair value charges, with a potential upswing in semiconductor cycles likely to further lift growth. 

Revenue for Tuan Sing’s property segment came in at $58 million for 1H20, up by around 15% y-o-y. Tan expects this segment to pick up in 2H2020 since construction activities for its Kandis Residence and Mont Botanik projects resume. Revenue could thus be recognised based on the progress of completion revenue recognition model, he argues. 

“Hyatt Regency Perth is also slated for asset enhancements in 2H20 which could take up significant resources. We think any potential asset enhancement initiatives (AEI) could come in the form of Grand Hyatt Melbourne although nothing has been announced so far,” comments Tan. Attempts to deleverage its balance sheet, however, suggests that Tuan Sing is unlikely to pursue aggressive AEI in 2H2020. 

Sales rates for Mont Botanik and Kandis Residence also rose 59% and 80% since June 2020, implying that these properties are quickly gaining popularity in the property market. Tuan Sing is also expected to launch Peak Residence in 2H20, although the launch date could be delayed given the government’s relaxation of qualifying certificate regulations.

“Given the current weak economic sentiment, we believe that the government is unlikely to tighten property market regulations. In fact, regulations have been relaxed with Tuan Sing no longer required to sell all units within two years of development completion. Further relaxation may be on the cards if the poor economic situation is prolonged,” remarks Tan. 

Nevertheless, a resurgence of Covid-19 infections in Victoria could weaken earnings, with cases soaring to around 15,000 in the Australian state. Victoria has reinstated lockdown measures  that will last for another six weeks from 2 August. The resumption of operations at Grand Hyatt Melbourne could therefore be delayed as a result of work disruptions. 

Occupancies at Hyatt Regency Perth could also be dampened as the state moved to close its borders.  Internal tourism will, however, still be allowed. In light of these restrictions, Tan forecasts FY2020 occupancies to range between 35% and 42.5% (down from 45-50%), with the Grand Hyatt Melbourne leaning towards the lower end of the range.

As of 2pm today, Tuan Sing is trading 0.035 points higher at $0.31 with a price-to-earnings (P/E) ratio of 9.63. Dividend yield for the counter is 1.94%.