SINGAPORE (June 2): Phillip Capital is starting coverage on Wheelock Properties Singapore (WPSG) with a "buy” and a target price of $2.28 given the likelihood of privatisation and depressed valuation compared to its peers.

In a Friday report, analyst Peter Ng says WPSG could be privatised by Hongkong-listed parent Wheelock and Company as shares of WPSG are thinly traded and has been trading at a significant 40% discount to its NAV. Additionally, the group has not sought for funds from the equity market for more than 11 years since 2006.

If the privatisation takes place, it won't be a first for parent, Wheelock and Co. In July 2010, Wheelock Properties HK was take private for HK$13 ($2.31) each following the sharp decline in share price caused by the 2008 global financial crisis

WPSG has also settled all its outstanding debt in 4Q16 which Ng views this is an unusual move for a property developer, considering that net cash could soar to a minimum of $830 million from $459 million by 3Q17 with the recognition of revenue from sales in The Panorama.

And if the unsold units from Ardmore Three and Scotts Square Residences -- both freehold developments in the CCR market segment -- are all sold, WPSG could even book in more cash, adds the analyst.

“Assuming a conservative premium of 20% to the current market capitalisation of $2.1 billion as at June 2, the Hong Kong parent would only need to shell out $648 million to gain full access to the potential $830 million cash pile since it owns 76% of WPSG,” says Ng.

Since the last successful land tender took place in 2013 for The Panorama, it has also been observed that WPSG has not participated in other land tenders under the Government Land Sale programme.

In addition, even without privatisation, WPSG has potential upside, argues Ng.

In Sept 2016, Wheelock and Co. acquired 4.5 million more WPSG shares at $1.455. The previous share acquisition was in end 2011 when the company acquired 5.2 million WPSG shares at $1.50 each.

Ng says the acquisition price of $1.455–$1.5 on two occasions suggests that price has somewhat already hit the floor.

And while the current share price of WPSG is about 15–20% higher, translating to a valuation of 0.7x PB which is still relatively low when compared to a peer average of 0.9x.

WPSG shares is an opportunity to enter Hotel Properties at a discount.

“Given that WPSG is trading at a 0.7x PB, we view that each share acquired in WPSG represents an opportunity to enter Hotel Properties shares at a significant discount which are trading at 1.1x PB,” says Ng.

WPSG owns a 22.6% stake in Hotel Properties via its associate company, 68 Holdings.

Shares of Wheelock Properties (S) closed 8 cents higher at $1.82 on Friday.