Broker's take: CGS-CIMB raises Perennial target price to S$1.18 after Capitol buy-out

DEVELOPER Perennial Real Estate Holdings' consolidated ownership of the heritage Capitol Singapore could lift earnings in the medium-term, CGS-CIMB analyst Lock Mun Yee noted, after the deal was announced on Monday.

She bumped up the target price for the stock by S$0.06, to S$1.18, while sticking to an "add" call.

Perennial said on Monday morning that it will purchase the remaining 50 per cent stake in the Capitol project from its co-owner, Pontiac Land Group affiliate Chesham Properties - putting an end to a years-long deadlock over the landmark site.

Ms Lock said that the Capitol project could yield between S$40 million and S$50 million in recurrent income annually, once it becomes fully operational.

No details have yet been shared on the strategy for the mixed development, she noted, but suggested that unsold apartments - 23 of them, as at end-2017 - "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," she added.

"Hence, we anticipate potential earnings upside when the property is fully ramped up in the medium-term."

Mainboard-listed Perennial has said that it intends to finance the acquisition - which includes S$129.6 million in cash for Chesham's shares in the project - with internal resources and borrowings.

"We estimate, factoring this outlay and consolidating Capitol's debt, (Perennial's) net debt-to-equity ratio could increase from 0.58 times as of 4Q17 to 0.7 times to 0.8 times," Ms Lock wrote.

She slashed Perennial's FY2018 earnings forecast by 95 per cent, with a predicted net profit of just S$500,000, "to take into account additional interest costs for the acquisition and lag time to ramp up the property performance".

But she also raised estimates for revalued net asset value by 5 per cent, to S$1.97 - assuming a capitalisation rate, or net operating income to property asset value ratio, of between 4.5 per cent and 5 per cent - and kicked earnings forecasts for FY2020 up by 18 per cent "to factor in the additional income post-consolidation and better asset performance".

"Upside catalyst is faster-than-projected ramp-up of the Capitol Singapore and a downside risk could be slower-than-expected operational improvement," Ms Lock added.

Perennial closed up on Monday by half a Singapore cent, or 0.59 per cent, at S$0.86.