Broker's take: Lim & Tan starts coverage on Bukit Sembawang at 'buy' with S$5.57 target

LIM & Tan Securities has initiated coverage on Bukit Sembawang Estates at "buy" with a S$5.57 target price, saying the counter is largely underpriced due to the undervaluation of over 90 per cent of its land bank.

In a report dated Feb 1, 2021, the research house said it foresees that Bukit Sembawang will eventually monetise its land bank via property development, as seen in the recent releases of Luxus Hill and Nim Collection.

"As Bukit Sembawang originated as a rubber company, they owned huge tracts of land meant for agricultural purposes. However, since their transition into a pure-play property developer, the land has not been revalued and is held at historical cost. Its cost is estimated to be as low as S$50 per square foot (psf) while its approximate selling price is at S$750 psf based on market approximations," noted Lim & Tan's research team.

"We like that Bukit Sembawang can capitalise on their existing large land bank as opposed to aggressively repurchasing land through en bloc exercises or through the government land sales programme."

Looking ahead, it believes demand for landed properties will remain high in light of a growing income per capita, as well as limited new supply in Singapore as the government looks to conserve land space.

The research team also expects the trend of rising landed property prices to continue, which would positively contribute to Bukit Sembawang's earnings especially given its savings on land cost.

Given that the property developer has returned to a net cash position as of H1 2021, Lim & Tan is anticipating that it will be able to "comfortably increase dividends" - which will serve as a key catalyst to its share price appreciation in the near term, in the brokerage's view.

Based on the share price of S$4.04, the stock is trading at 0.8 times price to book, which is under minus-one standard deviation of its historical mean.

The research house estimates that a dividend payout in the range of S$0.20 to S$0.33 per share would imply a dividend yield of 5-8.2 per cent.

"Moving forward, we expect Bukit Sembawang to continue growing their cash pile as earnings positively contribute to cash flows. Should they see opportunities like that of Katong Park Towers and Makeway View once again, their net cash position provides them with a comfortable buffer to take up leverage. Assuming a debt headroom of 50 per cent net gearing, Bukit Sembawang can take up another S$550 million in borrowings," said its research team.

Lim & Tan's initiation of Bukit Sembawang comes after DBS Group Research started coverage on the stock in October 2020 with a "buy" rating and S$5.44 target price.

Similarly, DBS was of the view that the property developer's large land bank was undervalued and pegged at an "extremely low" historical cost valuation. It estimated a revalued net asset value of S$12.10 per share.

Shares of Bukit Sembawang closed S$0.12 or 2.9 per cent higher at S$4.31 on Tuesday.