SINGAPORE (Oct 23): The potential spinoff of Lian Beng’s property business may trigger a stock price re-rating to $1.08, a 11.6% discount from its book value per share of $1.2076, says NRA Capital.

See: Lian Beng to spin off property development business with Catalist listing

Currently, the stock is trading at a low 7.1 times trailing earnings, which NRA reckons is partially due to the group’s heavy balance sheet which comprises of mainly investment properties as well as losses from the Manufacturing of Concrete & Asphalt segment.  

"But the spinoff of the property business and implementation of a dividend policy that pays out the rental income to shareholders may trigger a re-rating to $1.08 as shown in our workings," says NRA.

In a Monday commentary, the research house sees the possibility of a clear-cut split of Lian Beng’s multiple segments into two arms: Construction (Construction, Manufacturing of Concrete & Asphalt, Engineering and Leasing of Construction Machinery) and Property (Dormitory, Property Development, Investments in Properties & Securities).

Alternatively, the company may choose to spin off only its property development projects while retaining the investment properties and completed dormitories within the parent company. But NRA says this option is unlikely as the property development company from time to time may develop properties designated as investments.

“Administratively, it will be easier for the property development company to hold these properties on its balance sheet, than to sell them to the parent company on completion. The inclusion of investment properties in the spinoff is significant as the group has $711.3 million of investment properties on its balance sheet as of 1Q FY18 ended August,” says NRA.

NRA estimates that the property group may hold at least $1.1 billion of assets based on Lian Beng’s balance sheet as of the first quarter ended Aug.

Meanwhile, NRA notes how Lian Beng has begun to participate more actively in the Singapore market again, signalling that a rebuilding of its property development pipeline with the successful tendering for Rio Casa and Serangoon Ville.

The research house also highlights how the construction group’s $699 million order book stretching to FY2020 which translates to construction revenue of $233 million per annum. Assuming an average net margin of 5%, NRA expects the segment to generate a net profit of $11.65 million per annum.

As at 12.49pm, shares in Lian Beng are trading flat at 70 cents.