Chip Eng Seng Corporation
Sept 27 close: $0.25

CHIP Eng Seng (CES) is a play on the high-end and mid-tier property markets. It has a portfolio of four land parcels comprising three sites in the prime districts of 9, 10 and 11, at Grange Road (jointly with Citadel Equity Fund), Peck Hay Road (jointly with Lehman Brothers Real Estate Partners II) and Balmoral Road, and one site at West Coast Road, for mid-tier residential development.

Relatively cheap land bank: Management had the foresight to move into high-end and mid-tier property markets early and benefited from inexpensive land bank. Jointly with Keppel Land, CES acquired a prime residential site at Devonshire Road in June 2004, when the high-end housing market was soft. Launched in mid-2006, this project, Ritz Residences, was well received with sales to-date of close to 70 per cent. It yielded attractive profit margin of about 40 per cent.

Management was swift to acquire more land parcels when the high-end housing market was turning around. Over the past two years, CES has built up four additional land parcels, as mentioned earlier. At current selling prices, developments at Balmoral Road and Peck Hay Road, where the sites were acquired in 2005 and 1H2006 respectively, are expected to fetch profit margin of more than 25 per cent, while the development at Grange Road is expected to yield a profit margin of at least 15 per cent.

Higher ROE than most property developers: CES has a unique structure whereby it is involved in the construction of the private property development in which it has an equity stake. On this account, CES gets an additional level of construction revenue and profit for each development project. As a result, CES offers higher ROE - estimated at about 18 per cent (FY06) - than most local property developers.

Buildup expertise in construction of private housing for additional avenue of growth: CES is a well-established name in the construction market for public housing. Its venture into the construction of jointly-owned private housing projects will enable the group to tap into the building methodology and project management expertise of established private developers such as NTUC Choice Homes and Keppel Land. This will serve as an important reference for the group's future tender for construction work in the private housing segment.

Relatively high dividend yield for a developer: In view of strong profitability, CES is expected to offer dividend per share of at least 1.0 cents, similar to that of FY2005, providing an attractive dividend yield of at least 4.4 per cent.

Financially healthy: CES's net gearing is healthy at about 0.6 times (FY06). Taking into account further borrowing requirements for its future property developments, net gearing is expected to be maintained at below one time.

Valuation and recommendation: We are of the view that there is further capital upside, of about 10 per cent to 15 per cent, in the high-end and mid-tier home markets over the next 12 months. Accordingly, we value CES' revalued net asset value as $0.40 per share. As smaller developers generally trade at a discount to RNAV, we apply a conservative 25 per cent discount to the RNAV of CES. CES has a target price of $0.30, providing an upside of at least 36 per cent.

in retrospect (Oct 4 closing):