Sing Investments & Finance: Singing the right tunes
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Sing Investments
Broker House: Kim Eng
Analyst: KELive Research Team
Price: $1.68
Target: $2.85
Recommendation: BUY
Upside: 69.64%
Summary:
Analyst: KELive Research Team
Price: $1.68
Target: $2.85
Recommendation: BUY
Upside: 69.64%
Summary:
Poised to benefit from construction and property upswing. SIF’s $1b loan portfolio comprises mainly of property development (~43%) and mortgage (~25%, largely private properties) loans. Other lending includes vehicle hire purchase (~20%), factoring and SME loans. Loan growth from 2003-06 was mainly property-driven, with a 3-year CAGR of 28%. Overall quality of loans is good, with an aggregate NPL ratio of <2%>
Improving margins on cheaper deposits. The duration (weighted average term to maturity) of SIF’s deposit base is 4 months shorter than its loanbook (8 vs 12 months). This time lag in the deposit to- loan duration means that SIF will be affected in a rising interest rate environment as its cost of funds adjusts quicker than its lending rates. Firmer interest rates have reduced SIF’s net interest margin from 2.3% to 1.7% in FY06. However, recent MAS data shows that the 3, 6 and 12-month deposit rates for finance companies have fallen by 48bp on average for the Jan-May 07 period, while housing rates remained sticky due to strong demand for property and construction loans. As such, we expect SIF’s net interest margins and bottomline to improve significantly in FY07/08.
Hidden value in SIF Building. SIF’s new flagship building at 96 Robinson Road is currently carried in its books at $39m. 39% of the building is currently occupied by the main office while the remaining 61% of net lettable area (total 58,938 sf) is tenanted. Based on average rental rate of $7.00psf, the effective book yield is 7.8%. Using a capitalisation rate of 5% and current rentals of S$7.50psf, we estimate SIF building to be worth $106m, which throws up a revaluation surplus of $67m or $0.68 per share.
Good property proxy. TP $2.85 offers 70% upside. In view of SIF’s heavy exposure to the booming construction and property sectors, we forecast net profits to surpass the $10m mark in FY07. In tandem, SIF Building’s valuation is likely to further appreciate as demand for office space continues to outstrip supply in the near term. Ascribing a conservative 1.1x 2007 P/B to its banking assets plus SIF Building’s revised market value gives a target price of $2.85 for the stock. In contrast, Hong Leong Finance is trading at a forward P/B of 1.3x, whereas the three banks (DBS, UOB and OCBC) have market valuations of ~1.8x forward P/B. At $1.68, investors would be buying the finance business at a small discount whilst getting SIF Building for free. BUY
Improving margins on cheaper deposits. The duration (weighted average term to maturity) of SIF’s deposit base is 4 months shorter than its loanbook (8 vs 12 months). This time lag in the deposit to- loan duration means that SIF will be affected in a rising interest rate environment as its cost of funds adjusts quicker than its lending rates. Firmer interest rates have reduced SIF’s net interest margin from 2.3% to 1.7% in FY06. However, recent MAS data shows that the 3, 6 and 12-month deposit rates for finance companies have fallen by 48bp on average for the Jan-May 07 period, while housing rates remained sticky due to strong demand for property and construction loans. As such, we expect SIF’s net interest margins and bottomline to improve significantly in FY07/08.
Hidden value in SIF Building. SIF’s new flagship building at 96 Robinson Road is currently carried in its books at $39m. 39% of the building is currently occupied by the main office while the remaining 61% of net lettable area (total 58,938 sf) is tenanted. Based on average rental rate of $7.00psf, the effective book yield is 7.8%. Using a capitalisation rate of 5% and current rentals of S$7.50psf, we estimate SIF building to be worth $106m, which throws up a revaluation surplus of $67m or $0.68 per share.
Good property proxy. TP $2.85 offers 70% upside. In view of SIF’s heavy exposure to the booming construction and property sectors, we forecast net profits to surpass the $10m mark in FY07. In tandem, SIF Building’s valuation is likely to further appreciate as demand for office space continues to outstrip supply in the near term. Ascribing a conservative 1.1x 2007 P/B to its banking assets plus SIF Building’s revised market value gives a target price of $2.85 for the stock. In contrast, Hong Leong Finance is trading at a forward P/B of 1.3x, whereas the three banks (DBS, UOB and OCBC) have market valuations of ~1.8x forward P/B. At $1.68, investors would be buying the finance business at a small discount whilst getting SIF Building for free. BUY
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