1 YEAR END DEC (LKR mn) 2011 2012E 2013E 2014E Current Price (LKR) Revenue 2,500 1,700 6,600 7,900 14 EBIT 613 704 774 1,161 Target Price (LKR) Net Profit after Tax 2,600 1,100 1,300 2,300 18.1 EPS (LKR) 3.14 1.30 1.58 2.76 Recommendation EPS Growth (%) 155 -141 18 43 BUY EPS (Net of Revaluation Gain) 0.62 0.67 0.72 1.24 Date Recurrent EPS Growth (%) 15 8 6 73 19-Dec-12 DPS 0.30 0.20 0.24 0.41 Dividend Yield (%) 2.1 1.4 1.7 3.0 PER (x) 4 11 9 5 NAV/Share (LKR) 24.4 25.6 27.1 29.6 Discount to NAV (%) (74) (83) (93) (112) OSEA’s flagship WTC in Colombo features 95% occupancy at c.LKR 270psf on average rentals. OSEA’s Havelock City (HC) mixed development on 17 acres in Colombo has recommenced, with a target completion date of 2016. CAL expects 2012-15E revenue Cagr of 67%, with c.70% of revenue for 2013 and 2014 coming via HC apartment sales. This translates into a recurrent 2012-15E EPS Cagr of c.24%. OSEA’s c.74% deep discount to NAV stands out compared to the regional peer average of c.37% and local premium of 2%. CAL expects the discount to NAV to shrink as HC development visibility increases and apartment sales are booked starting 1H2013. CAL’s end-2013E target price for OSEA is LKR 18.1 (+29%), based on WTC FY13E reversionary rentals (c.40% discount to current NAV/share): BUY Timely Entry: Grade-A Colombo commercial occupancies are c.95% and majority owner occupied, while prime retail space is non-existent. Further, there is an imminent over-supply of residential space, with 80%+ of new apartments priced >LKR 25mn (vs. c.70% of demand is for units <LKR 25mn). HC’s units are priced c.LKR 25mn. Conservative Growth Assumptions: CAL’s forecast assumes c.64% of phase II and III apartments to be sold and a 44% occupancy rate of commercial space end-2015 with stable rents assured. OSEA has already sold 50% of its Phase II project. Upside of c.29% Possible: OSEA’s 2011 revenues were LKR 2.5bn, which CAL expects to decrease to LKR 1.7bn in 2012E due to revenue recognition policies. However, 2013E revenues should grow by c.280% YoY, translating to a recurrent EPS of LKR 0.72. CAL expects discount to NAV to shrink to 30% of 2013E WTC reversionary NAV as HC development visibility increases and apartments sales are recognized starting 1H2013. CAL’s target price is LKR 18.1 (+29%): BUY CAL Securities Level 5, “Millennium House”, No.46/58, Nawam Mawatha, Colombo 2 Tel: +94 11 231 7786 Email: [email protected]Purasisi Jinadasa Overseas Realty (Ceylon) PLC [OSEA.N0000] BUILDING UP MOMENTUM…HC FOR FREE! – BUY REFER p.15 FOR DISCLAIMER Market Capitalization (LKR): 12bn Market Capitalization (USD): 90mn 1-year avg. Daily T/O (USD): 11k Free Float: 17% 1-year Price H/L (LKR): 14.9/10
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1
YEAR END DEC (LKR mn) 2011 2012E 2013E 2014E
Current Price (LKR)
Revenue 2,500 1,700 6,600 7,900 14
EBIT 613 704 774 1,161 Target Price (LKR)
Net Profit after Tax 2,600 1,100 1,300 2,300 18.1
EPS (LKR) 3.14 1.30 1.58 2.76 Recommendation
EPS Growth (%) 155 -141 18 43 BUY
EPS (Net of Revaluation Gain) 0.62 0.67 0.72 1.24 Date
Recurrent EPS Growth (%) 15 8 6 73 19-Dec-12
DPS 0.30 0.20 0.24 0.41
Dividend Yield (%) 2.1 1.4 1.7 3.0
PER (x) 4 11 9 5
NAV/Share (LKR) 24.4 25.6 27.1 29.6
Discount to NAV (%) (74) (83) (93) (112)
OSEA’s flagship WTC in Colombo features 95% occupancy at c.LKR 270psf on
average rentals. OSEA’s Havelock City (HC) mixed development on 17 acres in
Colombo has recommenced, with a target completion date of 2016. CAL
expects 2012-15E revenue Cagr of 67%, with c.70% of revenue for 2013 and
2014 coming via HC apartment sales. This translates into a recurrent 2012-15E
EPS Cagr of c.24%. OSEA’s c.74% deep discount to NAV stands out compared
to the regional peer average of c.37% and local premium of 2%. CAL expects
the discount to NAV to shrink as HC development visibility increases and
apartment sales are booked starting 1H2013. CAL’s end-2013E target price for
OSEA is LKR 18.1 (+29%), based on WTC FY13E reversionary rentals (c.40%
discount to current NAV/share): BUY
Timely Entry: Grade-A Colombo commercial occupancies are c.95% and
majority owner occupied, while prime retail space is non-existent. Further,
there is an imminent over-supply of residential space, with 80%+ of new
apartments priced >LKR 25mn (vs. c.70% of demand is for units <LKR
25mn). HC’s units are priced c.LKR 25mn.
Conservative Growth Assumptions: CAL’s forecast assumes c.64% of phase
II and III apartments to be sold and a 44% occupancy rate of commercial
space end-2015 with stable rents assured. OSEA has already sold 50% of its
Phase II project.
Upside of c.29% Possible: OSEA’s 2011 revenues were LKR 2.5bn, which
CAL expects to decrease to LKR 1.7bn in 2012E due to revenue recognition
policies. However, 2013E revenues should grow by c.280% YoY, translating
to a recurrent EPS of LKR 0.72. CAL expects discount to NAV to shrink to
30% of 2013E WTC reversionary NAV as HC development visibility
increases and apartments sales are recognized starting 1H2013. CAL’s
- c.5% of Sri Lanka households can afford a c.LKR 25mn apartment at present income levels - The Colombo property market leans heavily towards residential - Over-supply of residential space imminent, particularly luxury units (>LKR 30mn) - However, under-supply of commercial space in Colombo is an opportunity (c.1.4mn A-grade
sq.ft. as of 2011) - Colombo modern retail space also needs to catch-up to residential growth (current c.450k
sq.ft.)
- OSEA’s HC residential development to come in before the down-turn in demand - Assuming 10% down and no interim payments, the HC project is feasible on a 1.5x interest
coverage ratio - CAL sees potential +29% upside to LKR 18.1 by end 2013 based on WTC reversionary
rentals - Alternatively, using a target regional peer discount to NAV generates +23% price increase to
LKR 17.2 by end-2013 - Havelock City development to drive a c.67% 2012-15E revenue CAGR… - …based on conservative apartment sales (64% of phase II and III units sold by 2015E) - Higher margins are also likely if mismatches arise between sales and completion of
construction - Havelock City commercial and retail space to provide stability post 2015 - Although current rental yields are low (c.2% in 2011)… - …adjusted yield can expand to c.5% by 2013E - OSEA is down c.71% from its all-time high of LKR 24
I. Over-supply of residential properties imminent, but
opportunity remains for commercial developments
II. HC comes in priced right for residential and timed
right for commercial
III. Appendices
3
I. OVER-SUPPLY OF RESIDENTIAL PROPERTIES IMMINENT, BUT
OPPORTUNITY REMAINS FOR COMMERCIAL DEVELOPMENTS
507 1,242
4,122
24,077
-
5,000
10,000
15,000
20,000
25,000
30,000
40% 40% 20% Top 5%
Ap
artm
en
t V
alu
e (
LKR
Th
sd)
Sri Lanka Population
Apartment Affordability Based on Income
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
1 4 7 10 13 16 19 22 25
LKR
Th
sd
Loan Period (in Years)
Monthly income of 200k Monthly income of 400k
Monthly income of 600k
Max loan: LKR 5.9mn
Max loan: LKR 11.7mn
Max loan: LKR 17.6mn
Source: CAL Estimates and Statistical and Census Department
c.5% of Sri Lanka households can afford a c.LKR 25mn
apartment at present income levels
c.5% of Sri Lanka households can afford an apartment >LKR 25mn based on a minimum down-payment of 30% of property value and c.USD 2,400/capita GDP Currently, c.70% of demand is for apartments within the
LKR 25mn range
Regular Bank Terms: - Maximum of 40% of household monthly income considered for installments - Loan interest rate is 16% fixed p.a. - Total loan is capped at 70% of property value
4
-
1
2
3
4
5
6
7
8
9
10
Commercial Space Retail Residential
Mill
ion
s sq
.ft.
Avg. sq.ft.=980
Avg. sq.ft.=91k Avg. sq.ft.=281k
9
4
-
2
4
6
8
10
12
14
Mill
ion
s sq
.ft.
Estimated Additional Space by 2015
Current Residential Space
The Colombo property market leans heavily towards
residential
Over-supply of residential space imminent, particularly
luxury units (>LKR 30mn)
The residential property market taken into consideration includes only apartments, while retail space consists of mall space. Opportunity remains to develop retail and commercial space to match the increase in residential property
Over the next few years, 80%+ of new units will be priced above LKR 30mn, leading to an over-supply. The ramp-up in apartment supply will require uptake by foreigners
Source: Company Reports and CAL Estimates
5
1.4
3.6
-
1
2
3
4
5
6
Commercial Space
Mill
ion
s sq
.ft.
A-Grade Rest
453k
644k
Current Additional Space by 2016
LKR/sq.ft.
Avg. Cost 200
Avg. Rent 270
Avg. Yield on New
Developments
7%
Occupancy rates of commercial space in Colombo is c.95% and majority is
owner dominated
However, under-supply of commercial space in Colombo is
an opportunity (c.1.4mn A-grade sq.ft. as of 2011)
Colombo modern retail space also needs to catch-up to
residential growth (current c.450k sq.ft.)
The additional space that we anticipate includes the Havelock City, Mustafa and Liberty shopping complexes. Total retail space within Colombo environs may increase by 42% in 2016 CAL expects real GDP/capita to reach
c.USD 3,000 in 2016
Expected real
GDP/Capita:
c.USD 3,000
Real
GDP/Capita:
c.USD 2,400
Source: Company Reports and CAL Estimates
6
II. HC COMES IN PRICED RIGHT FOR RESIDENTIAL AND TIMED RIGHT
FOR COMMERCIAL
14% 26% 46% 64%
-
200
400
600
800
1,000
1,200
2011 2012E 2013E 2014E 2015E
Yearly Demand
Yearly Havelock City Units Sold and Cumulative %
Yearly Apartment Supply
(6)
(4)
(2)
-
2
4
6
8
10
12
14
2012E 2013E 2014E 2015E 2016E
LK
R M
illio
ns
Revenue IS CashFlow In ApartmentsCashFlow Out Apartments Cashflow Out CommercialCashflow In Commercial CF End of Period
Estimated Project Cashflows without Debt
OSEA’s HC residential development to come in before the
down-turn in demand
CAL expects demand for apartments to decline through 2015, as the majority of apartments below LKR 25mn come into the market (includes HC) HC has already sold 50% of the units under construction in its Phase II project (c.109 apartments) and we expect c.26% of units from its Phase II and III projects to be sold by end-2013 (c.200
apartments)
Assuming 10% down and no interim payments, the HC
project is feasible on a 1.5x interest coverage ratio
CAL assumes a 10% down payment, revenue recognition once 25% of construction is complete and no further interim payments till apartment hand-over (2014E for Phase II and 2016E for Phase III). OSEA can fund the project with a 1.5x interest coverage ratio on FY11 sustainable NOI of c.LKR 712mn (resulting debt of c.LKR 8.2bn and D/E of 40/60). OSEA’s 3Q2012 debt was c.LKR 2.3bn (D/E 12%) OSEA has c.LKR 1.8bn in cash and has the ability to draw low-cost funding
from its parent
Source: Company Reports and CAL Estimates
7
LKR thsd 2011 2012E 2013E WTC
Leasable Area 583 583 583
Average psf 190 200 270
Yearly Revenue 1,063,392 1,329,240 1,794,474
Discount Factor 7% 7% 7%
Property Value 16,359,877 20,449,846 7,607,292
-Net Debt (999,744) (1,053,741) (7,729,291)
NAV/Share 18.2 23.0 23.6
Current Share Price LKR 14
Discount to NAV -30% -64% -68%
COMPANY COUNTRY - CURRENCY
NAV SHARE PRICE
(DISCOUNT)/PREMIUM TO NAV
Overseas Realty SL - LKR 23.5 14.0 (68%)
Asian Hotels & Properties SL - LKR 33.8 79.0 57%
AVERAGE (11%)
Agile Property Holdings HK - HKD 6.7 10.5 36%
Franshion Properties (China) Ltd HK - HKD 3.0 2.7 (10%)
Cheung Kong Holdings Ltd HK - HKD 138.6 116.7 (19%)
AVERAGE 2%
Hongkong Land Holdings Limited SG - USD 10.8 6.5 (66%)
Bukit Sembawang Estates Ltd SG - SGD 4.2 5.8 27%
Chip Eng Seng Corporation Ltd SG - SGD 0.6 0.5 (30%)
CapitaLand Ltd SG - SGD 3.5 3.5 0%
AVERAGE (17%)
PEER AVERAGE (8%)
Amcorp Properties Bhd MAL - RM 1.1 0.5 (139%)
Country Heights Holdings BHD MAL - RM 2.7 1.0 (167%)
Eastern & Oriental Bhd MAL - RM 1.2 1.6 27%
AVERAGE (93%)
Anant Raj Industries Ltd IND - RS 126.8 101.1 (25%)
Housing Development & Infrastructure Ltd IND - RS 239.5 114.5 (109%)
AVERAGE (67%)
REGIONAL AVERAGE (37%)
CAL sees potential +29% upside to LKR 18.1 by end 2013
based on WTC reversionary rentals
Alternatively, using a target regional peer discount to NAV
generates +23% price increase to LKR 17.2 by end-2013
A reversion to the peer average should provide a 1-year share price upside of 56% (LKR 21.8). A more conservative regional reversion should provide a 1-year share price upside of 23% (LKR 17.2).
CAL expects discount to NAV to shrink as visibility of the HC development increases and sales are booked
Source: Company Reports and CAL Estimates
OSEA’s discount to
NAV in 2011 was
c.30%. Maintaining a
30% discount,
price/share could
adjust to LKR 18.1
(+29%) end-2013E,
based solely on
WTC reversionary
rent potential
8
847k
1,196k
1,768k 2,084k
3,440k
1,588k
487k
4,682k 5,728k
4,424k
57k 49k 127k 130k 135k
0%
20%
40%
60%
80%
100%
120%
2011 2012E 2013E 2014E 2015E
Rental Income Sale of Apartments Other Services
rEPS: 0.62 0.67 0.72 1.24 1.30
0%
10%
20%
30%
40%
50%
60%
70%
0
20
40
60
80
100
120
140
160
180
2012E 2013E 2014E 2015E
Apartments Sold (LHS) % of Total Apartments Sold (Phase II & III)
…based on conservative apartment sales (64% of phase II
and III units sold by 2015E)
Havelock City development to drive a c.67% 2012-15E
revenue CAGR…
50% of Phase II apartments are already sold. CAL expects 64% of total apartments being constructed in Phase II and III (c.498) to be sold by
2015
2012E recurrent
EPS is LKR 0.67
and should grow by
c.7% in 2013E to
LKR 0.72 (CAGR of
33% over 2012-15E)
CAL expects c.70% of revenue to come from apartment sales in 2013 and 2014 2015E total revenue should be flat YoY, as OSEA’s revenue mix shifts from a dependency on apartment sales to a steadier rental
income base
Source: Company Reports and CAL Estimates
*rEPS: Recurrent Earnings/Share
9
555
737
923 931
1,235
1,836
2,256
29%
43%
37%
54%
19%
23%
28%
0%
10%
20%
30%
40%
50%
60%
-
500
1,000
1,500
2,000
2,500
2009 2010 2011 2012E 2013E 2014E 2015E
LKR
(Th
sd)
Gross Profit GP Margin
847
1,196
1,768
2,084
3,440
89% 90% 95% 98% 98%
44%
-10%
10%
30%
50%
70%
90%
110%
130%
150%
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2011 2012E 2013E 2014E 2015E
LKR
(Th
sd)
Rental Income (LHS) Occupancy at WTC Combined Occupancy at HC
Havelock City commercial and retail space to provide
stability post 2015
Rental income should start growing starting 2015 as HC’s commercial and retail space comes into the market (44% estimated combined occupancy by end-2015)
CAL has assumed conservative cost assumptions due to upcoming sales of apartments. However, higher GP margins may be likely if mismatches arise between when an apartment is constructed and sold (e.g. 2010 and
2012E)
Higher margins are also likely if mismatches arise between
Although current rental yields are low (c.2% in 2011)…
…adjusted yield can expand to c.5% by 2013E
CAL has assumed a conservative c.40% in direct costs, resulting in a yield of 2.8% in 2012E at current market values, due to the lack of debt Post-2014, CAL expects a significant uplift in yields due to HC’s commercial and
retail space
At current market values, OSEA’s 2011 sustainable NOI is c.LKR 712mn. Assuming OSEA maintains an interest coverage ratio of 1.5x going forward, yields can top 5% in 2013E (operating costs maintained at 40% of pro
forma rent)
11
60
65
70
75
80
85
90
95
100
105
110
12/16/2011 4/16/2012 8/16/2012 12/16/2012
Ind
ex
Bas
e=1
00
ASI OSEA
Market Cap (USD): 90mn 1 Year Avg. Daily T/O (USD): 11k 1 Year Price H/L (LKR): 14.9/10 Free Float: 17% Current Price (LKR): 14
OSEA is down c.71% from its all time high of LKR 24
CAL expects lost interest in OSEA to fade away once visibility of its HC development project increases Wider interest should commence during 2H2013 as a result of recognizing sales of apartments which
occurred during 2012
Source: Company Reports and CAL Estimates
12
III. APPENDICES
Rental Revenue in 2013E
LKR (thsd)
1,591,100
1,679,495
1,767,889
1,856,284
1,949,098
Dir
ect
Co
sts
% o
f
Re
nta
l
20% 5.7% 6.0% 6.3% 6.7% 7.0%
30% 5.0% 5.3% 5.6% 5.8% 6.1%
40% 4.3% 4.5% 4.8% 5.0% 5.2%
50% 3.6% 3.8% 4.0% 4.2% 4.4%
60% 2.9% 3.0% 3.2% 3.3% 3.5%
LKR thsd 2011 2012E 2013E 2014E 2015E
Rental Income 847,121 1,196,316 1,767,889 2,084,248 3,439,932
Sale of Apartments 1,587,516 487,143 4,682,477 5,728,031 4,424,443
Other Services 56,627 48,568 126,990 130,113 134,904
Total Revenue 2,491,264 1,732,027 6,577,356 7,942,392 7,999,279
Direct Operating Expenses & Cost of Apartment Sales