DMG @ S$0.25 (07 Sep 2007)
- Buy (Initiate Coverage)
- Target Price: S$0.28
- Lock Mun Yee - +65 6232 3890 - munyee.lock@dmgaps.com.sg
- Major Shareholders (%): Hor Kew Hldgs 33.53%
- Bright prospects
- Hor Kew Corporation is a recovery story, built on twin drivers of scaling up residential development income and reversing losses from construction and pre-fabrication operations. Sizeable contributions from its 2 projects, One Oxley Rise and the upcoming East Coast Rd development, are underpinned by high average selling prices and low breakeven costs. Greater prefabrication volume coupled with improving margins should support a turnaround in manufacturing contributions. Meanwhile, potential for increasingconstruction profits, in tandem with the robust industry, could provide room for earnings upside surprise. Enhancement of shareholder value through renewing older industrial assets could add another 2-3cts to asset backing.Recommend Buy with a price target of $0.28.
- $125m in residential pre-sales and still growing. Residential income would be the major growth driver to earnings over the next 2-3 years. Its two development projects, One Oxley Rise and East Coast development could generate sizeable PBT of about $100m or a 40-50% margin when fully sold. Average selling prices should remain high while breakeven cost is low as the landholdings were acquired prior to the price run-up. The improved earnings performance should translate to higher ROE and reduced gearing, thus strengthening its balance sheet.
- Prefabrication volume and margins to expand. Prefabrication component demand is likely to accelerate given the upcycle in the construction sector. In addition to operating leverage,better pricing power is likely to boost margin spreads. Completion of the lower yielding contracts tied before the hike in raw material prices, ability to factor in the higher raw material costs as well as greater demand should expand returns from its manufacturing operations.
- Potential for shareholder value enhancement. It has plans to rebuild its Kallang industrial building into a hi-tech/ quasi office space building. Prospect of higher rents given the spillover of demand for office space and better quality space when completed should enhancethe value of the property and add an estimated 2-3cts to RNAV. In the longer run, the well-located property can also be monetized through sale to reits.
- Valuation and recommendation. Hor Kew offers exposure to the residential property and construction sectors. The stock is trading at a 19% discount to RNAV. Our price target of $0.28 is based on a 10% discount to asset backing, in view of its small market capitalization and lack of landbank and earnings growth visibility beyond FY09.