March 13, 2018

PREH announced that it will purchase the remaining 50% stake in The Capitol Singapore from Chesham Properties for S$129.6m, based on a property value of S$1,028m, 2.6% above the Dec 17 valuation. Post transaction, PREH will own 100% of the project and will take over existing loans of S$368.6m plus accrued interest and make ancillary payments of S$3m to Patina Hotels & Resorts Pte Ltd. The Capitol Singapore comprises Eden Residences Capitol, 157 hotel rooms, retail and theatre components.

We view the deal positively as it signals the resolution of the deadlock on the project and progress can now be made to unlock value and returns from this iconic development. PREH intends to finance this acquisition via cash and debt. We estimate, factoring this outlay and consolidating Capitol’s debt, PREH’s net debt-to-equity ratio could increase from 0.58x as of 4Q17 to 0.7-0.8x. More importantly, we think once the project becomes fully operational, it can generate S$40m-50m of recurrent income annually.  While no details have been shared on the strategy for this development, we note, based on URA statistics, there were 23 unsold apartments as at end-4Q17 that can be monetised in the current rising residential market. We believe the retail component is under-rented, based on our estimates of a low double-digit rate. The hotel component was completed in 4Q15 but has yet to commence operations. Hence, we anticipate potential earnings upside when the property is fully ramped up in the medium term.  Our RNAV estimate is raised by 5% to S$1.97, assuming a 4.5-5% cap rate for the various property components. Based on the property value of S$1,028m, we reckon the completed non-residential GFA could be valued at S$1,767psf, which appears to be below replacement cost based on recent transacted land values, such as the S$1,706psf and S$1,689 psf GFA paid by Guocoland and IOI Properties for the Beach Rd commercial site and white site at Central Boulevard respectively.

We lower our FY18F EPS by 95% to take into account additional interest costs for the acquisition and lag time to ramp up the property performance. Our FY19-20F EPS is raised by 2-18% to factor in the additional income post consolidation and better asset performance. Maintain our Add rating with a slightly higher TP of S$1.18, pegged to a 40% discount to RNAV. Upside catalyst is faster-than-projected ramp-up of The Capitol Singapore and a downside risk could be slower-than-expected operational improvement. Maintain Add with a slightly higher TP of S$1.18 by CIMB. Share price closed at S$1.025