Published November 18, 2008

Reassuring - but more needed from SC Global


SC GLOBAL Developments last Wednesday reported a decent set of third-quarter results, posting a 121 per cent jump in net profit to $9.6 million. This was despite weaker sales as the company improved its pre-tax margins with higher selling prices for homes and lower sale costs and expenses.

But what was of more interest to market watchers was the fact that the company also announced that in order to boost its cash in hand, it recently drew some $100 million from its reserve facilities - a move that is a common practice for listed companies here. SC Global cited volatile financial markets and the credit environment in October and November as reasons for the move.

The developer's move also seems to be aimed at alleviating investor concerns about SC Global. 'SC Global is trying to tell the market that it does have the means to raise money if it needs to,' said one property analyst. The company had cash and cash equivalents of $67.4 million at end-September. Assuming that not too much of the newly raised money is spent over the current quarter, SC Global should be able to boost its cash and cash equivalents to well over $100 million by the end of this year.

The company also hinted in its Q3 results that its debt-to-equity ratio - which now stands at 3.38 times - could be reduced somewhat if its stake in Australian-listed AVJennings (AVJ) crosses the 50 per cent mark. Right now, SC Global's stake in AVJ stands at 49.63 per cent, and 'should the group consolidate AVJ as a subsidiary, it is expected to significantly reduce the group's gearing ratio', SC Global said in a filing to the Singapore Exchange (SGX).

SC Global's moves to improve its cash position and assure investors that gearing could be reduced in future are certainly commendable.

However, its stock has been battered, along with the general market, and despite all the good news - better earnings during a quarter where most developers saw profits fall, as well as the securing of $100 million of cash and the news that gearing could be lowered - its share price has not recovered.

SC Global has current liabilities of $13.5 million, while long-term liabilities stand at $1.3 billion, one analyst pointed out. In view of this, $100 million seems like a small amount, he noted. This view assumes that SC Global won't generate significant amounts of cashflow in the future by selling more units in its inventory.

DBS Vickers analyst Adrian Chua pointed out in a note a day after the results that operating cashflow for SC Global continues to be negative in Q3 2008 due to an increase in non-cash working capital, and that its gearing ratio continues to be one of the highest among property developers, with its loans entirely secured against its properties. But financing for the remainder of SC Global's landbank projects at Ardmore and Sentosa have been secured, although construction tenders have not yet been called, he added.

Right now, some analysts are pricing in a worst-case sector scenario of zero sales, credit tightening, asset devaluation, and even potential customer default - which has led to a plunge in SC Global's share price. The stock has lost 76.7 per cent so far this year.

While it is good that SC Global is taking steps to improve its cash position and gearing, whether the developer succeeds in convincing investors depends a lot on how much the general market sentiment improves or worsens going forward - and whether the developer continues to generate cashflow by selling more of its luxury homes.