(10-09-2012, 10:10 AM)dzwm87 Wrote: Chip Eng Seng's construction order are largely driven by either HDB contracts or internal property development.
There will be a surge in construction orders from HDB - largely BTO flats. However, HDB project margins always tend to be very thin; around single digit margins. A look at CES's historical segment performance shows that its construction segment has been making losses from 2007 to 2009. It return to profit in 2010 with a OPM of 8%. In 2011, OPM surged to 44%. I am not aware of the reason for the surge but based on past records, it's likely to be non-recurring.
Qualitatively-speaking, the low margin construction business is also the reason why many construction companies are shifting towards property development as well. If margins are so good at double-digits, then construction companies should focus on construction business alone.
I've taken a look at CES. I got to say their dividend yield is really attractive. At 47.5c, implied yield is around 8.4%. Such dividend payment has been such in 2010 and 2011. However, what's contradicting it is the negative Net Op CF. This means that dividend payment is likely to be financed by debt. I do admit that the recent adoption of INT FRS 115 has kinda messed up the historical comparison. But even before the adoption in 2010, Net Op CF hasn't been impressive.
Significant property project in the future is likely to be its freehold Fulcrum condo and its Park Hotel development. Margins are high for Fulcrum with my estimations at around 45% but there is probably more uncertainty in selling it off. Other property developments are more or less completed. My estimated GPMs for the projects are as such: Prive (5%), My Manhattan (25%), Belysa (11%), Belvia (5%). Seem like the near future will be the recognition of sales from these projects - based on the completion accounting method.
CES Cashflow is negative because cashflow for the Australian development 33M will not be recognised or booked till the units have been handed over to the purchaser. The management has already pointed this out 2 years ago at the AGM. That with regards to foreign property development, its only 1 way until the whole development is completed.
The construction business is generally a low margin high volume business. Earning a low double digit margin is considered excellent in today's business environment.
They still have land in perth for development and not forgetting their freehold industrial land in Pasir Panjang.
They still have land in perth for development and not forgetting their freehold industrial land in Pasir Panjang.
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Investor central has a video about why CES is not able to sell any units at it perth land parcel. See the video from 10 min onwards. Apparently, it can't build a 12 storey development when the height limit at the place is 8 storey.
I must admit the CEO of Inventor Central Mark Laudi is very detailed and meticulous when it comes to analysis and asking questions. While he checked google maps and called White Sands Tavern, seemingly thorough home works have been done especially he pulled the 152 page reports about bribery investigation of stirling coucil. However, he missed one important thing... google more about the regulation that restrict 8 storey building limit...
This was in 2008:
Amendment 458 to the City of Stirling Town Planning Scheme has been approved to allow 3 sites to build 12 storeys high building, the White Sands Tavern, was one of them, condition is to provide car and pedestrian access to link West Coast Highway and Hastings Street.
Cheers.
Chip Eng seng has many catalysts for stock price movements. But I think one more interesting angle is that among so many small developers it is one of the rare ones whose shares is not tightly held so maybe it will become a hostile takeover target.
Imagine its RNAV is about $1.20-1.40 depending how much profit expected from its shops sales in Alexandra hotel/retail project and its potential big earnings in 33M, Tower Melbourne and the Perth project - all in Australia which many analysts and investors did not even know until recently. All these land are bought at very low prices of A$20-25.5m yet the development values are potentially very high because of the high plot ratio. For example, Tower Melbourne site bought at only A$25.5m and total sales figure probably A$250 - 350 million!
If I were another developer, maybe I will look to take over Chip Eng seng rather than bid for government land at overpriced levels. This one got lots of scrip in the public instead of heavily owned by one family, so gaining control by becoming biggest shareholder is possible.
13-11-2012, 12:35 AM (This post was last modified: 13-11-2012, 12:37 AM by Greenrookie.)
I did a quick comparison among several construction companies, and zoomed in to compare Tiong Seng, Chip Eng Seng and Lian Beng. It would be noteworthy to know that construction companies are divided into 2 main categories, building and civil engineering. Of the three, Tiong Seng has more civil engineering projects under its bag due to its joint ventures. Chip Eng Seng and Lian Beng are heavily relied on building construction. Investors hoping that these 2 companies can get a pie of the MRT lines public projects shouldn’t keep their hopes too high.
After comparing the three companies, I prefer Chip Eng Seng.
Reasons:
1) All three relied heavily on building constructions, but CES get the bulk of the construction contracts from HDB, which have a bumper of contracts to tender for in the past 3 months, a quick check in GEbiz will show 7 tenders each for the month of September and October, and CES has a long working relationship with HDB and has thus far being able to win many HDB contracts. In fact, in the earlier years, when CES goes IPO, more than90% of contracts come from HDB. Lian BEng and Tiong Seng however, are stronger at private projects, yet with the cooling measures aimed at private sector, I am afraid the pie might actually shrink going forward.
2) In terms of construction capabilities, Tiong Seng actually looks most promising, with 1st mover advantage in Green Building construction, and wins many awards from BCA, to recognize its capabilities in green building construction, productivity, and etc. Its order book of 1.4 billion as of 31 dec 2011 and since then have clinch project worth another 500 million, speaks volume about its clients confidence in the company. However, the only problem is its property development arm, while still small in terms of revenue contribution, is mainly focused in china. We all know about china curbs in property and A closer look at the Q1, Q2 and Q3report on Tiong Seng china property development will show that commencement of construction of suzhou project is delayed from Q2 to Q4, phase 2 sales of Equinox is also delayed from Q2 to Q3, and then now to Q4. Seem like the property curbs in china do have an impact on its PRC property development.
3) Dividend yield, CES has been giving out dividend since listing and the yield is high. The record 4 cents per shares yield translate to 8.5 % yield. If the dividend is lower to 3 cents, it’s still a good 6.3% yield, higher than Lian Beng and Tiong Seng. Also, although the dividend per share paid out is at record high, the payout ratio is low, 15%, and 21% of earning in 2011 and 2012. Prior to the 2 years, payout ratio range from 32% to 65%. This speaks sustainability of dividend as long as property development arm holds up.
4) Highly visible earnings from property development. 33M is already fully sold and will be recognized in from Q3 onwards, Prive and Belysa (Both 40% ownership)and My Matthantan will TOP in 2013, Belysa is already 86.9% sold, will TOP in 2014, followed by fulcrum, most probably in 2015. Soft launch for tower Melbourne is 56.5% sold. They will also build a hotel at alexander, and that will most probably be ready in 2015. The land parcel at Perth is still pending development, and is room for growth with low land cost.
5) In terms of valuation, CES, Lian Beng and Tiong Seng are trading at 0.74, 0.86, 0.77 P/B, CES with the biggest amount of property in development, yet lowest in terms of P/B ratio
6) We all know construction is a low margin business, that’s why construction companies are going into the property development business, out of which, CES has the largest in proportion to its revenue and profits. In terms of construction margins, LianBeng beats CES, CES bulk of construction contracts come from HDB, while Lian Beng comes from the private sector, whose margin is higher. That is why when construction costs escalate in the 2008, CES is making a loss in its construction arms, whereas LianBeng still manage a 7% margin. But when it comes to property development, CES makes Lian Beng eat dusk. (See attached excel on segment margin.)
7) Lianbeng has business in concrete mixing whereas CES has business in precasting. Lianbeng’s property development is still a small proportion to its overall revenue and profits (around 10%), although it is still growing, CES on the other hand, has been in this business since 2000, and has fared rather well recently in Australia. (Land cost is low, but at prime area- CBD), forms a big portion of profits-40%.
Risks:
1) Ces has become more and more like a property developer than a construction company, and will be badly affected if the property sector is hit (Think cooling measures and interest rate hike). As a property developer, it is a small player and does not have a big landbank.
2) Both construction and property development is a highly competitive business, and CES is hardly in any dominant position, with razor thin margins for its construction of HDB flats
3) Australia market while not as risky as china market, is still subject to risks. It didn’t update the investors on the Vietnam venture, which I believed has gone to the dogs.
4) Construction cost remain high, looking at the estimated construction costs from BCA website, construction costs in 2011 and 2012 is dangerous close to the year 2008 end and 2009, where CES just break even in the construction business. Going forward, I believe margin for the construction business will be in the low single digit.
In Q3 financial report, CES clocked S$194m of property development primarily due to 33M recognition. What I fail to understand is the the gross profit hardly move......why? In actual fact its gross margin in Q3 2012 is a lot worse than in Q3 2011. Could someone pls enlighten me? Thanks
(13-11-2012, 08:57 PM)BeDisciplined Wrote: In Q3 financial report, CES clocked S$194m of property development primarily due to 33M recognition. What I fail to understand is the the gross profit hardly move......why? In actual fact its gross margin in Q3 2012 is a lot worse than in Q3 2011. Could someone pls enlighten me? Thanks
Because margins from 33M, Prive and Belysa was not very fantastic. Its in the low double digit margins compared to the standard 20% because.....the CEO misread the market and thought the property market will soften.
But the good news is, they will soft launch the strata retail units at Park Hotel Alexander from 7000SGD psf to rev up their margins again
Q3 2012 GM at 21% (55,898/262,692) But Q3 2011 GM at 61%!! (44,027 / 72,304).....what a big difference? Could mispricing cause such a big differnce
33M has 388units. Assume property development is exclusively 33M, S$194,094,000/388 = S$500k per unit....looks right?
Assume most of the gross profit comes from 33M, that would work out to be 55,898,000 / 388 = $144k per unit. How does that sound?
If that sounds right, then what on earth are they selling in Q3 2011 that can make gross profit of $44m with $72m revenue?
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