Brokers' Call

LHN

Broker: NRA Capital

Call: Overweight

Target price: 28.5 Singapore cents

Over the last one month, property management group LHN announced its third-quarter results to June this year and completed the acquisition of a carpark in Beach Road.

Gross margin has remained at 27.5 per cent to 27.7 per cent over the last two quarters, while the nine-month profit after tax and minority interest (Patmi) of $5.9 million amounted to 83 per cent of the previous forecast for the financial year.

In the light of the strong results, projected gross margin is revised to 27 per cent for financial year 2016 and a fourth-quarter Patmi of $1.6 million is conservatively expected, excluding any fair value gains from its properties.

Other than Golden Mile Tower in Beach Road, LHN has added seven more locations to its carpark management portfolio, bringing the total number of carpark spaces under management to more than 6,800 across 37 carparks.

While the revenue contribution of this business is relatively low at $7.13 million in the financial year to September 2015, the added carpark spaces and higher parking rates may contribute an additional net profit of $700,000 in financial year 2017.

Second, there is also the upcoming completion of addition and alteration works for 100 Eunos Avenue 7, which is wholly owned by the company. It may contribute about $200,000 to $400,000 of net profit per year on full occupancy.

In all, there is visibility for $900,000 to $1.1 million of net profit growth in financial year 2017.

PERENNIAL REAL ESTATE HOLDINGS

Broker: DBS Group Research

Call: Buy

Target price: $1.32

Perennial announced that it has entered into an investment agreement to acquire 49.9 per cent of Shanghai Renshoutang (Shanghai RST), one of the pioneer and largest private eldercare operators in Shanghai, with assets including retirement, nursing and rehabilitation homes, a hospital, daycare centres and pharmacies.

Shanghai RST is Perennial's joint venture partner to set up and manage Chengdu Xiehe International Eldercare Retirement Home at its Chengdu Medical Hub, via a memorandum of understanding signed in January for a 40:40:20 joint venture together with Shanghai Summit Property Development.

The transaction is expected to be completed by the first quarter of next year.

Post-acquisition, Perennial will be the largest single shareholder of Shanghai RST, followed by the founder, Dr Feng Qiang.

The acquisition is to be financed by internal funds and external borrowings and pro forma impact on net profits is estimated to be approximately 13.2 per cent, while its earnings per share will increase by 22 per cent.

GLOBAL LOGISTIC PROPERTIES

Broker: CIMB Research

Call: Add

Target price: $2.73

GLP has increased its exposure to the buoyant United States logistics facilities market, with the proposed purchase of its third US portfolio, valued at US$1.1 billion (S$1.5 billion), from Hillwood Development Company. An initial US$700 million portfolio is expected to be acquired on Dec 16.

GLP will be the asset manager and expects to retain a 10 per cent stake post-syndication. Following the purchase, GLP will be the second-largest owner and operator of logistics facilities in the US, with an expanded portfolio of 17 million sq m, making up 8 per cent of its total net asset value.

The initial 1 million sq m completed portfolio is young, with an average age of three years, and is 100 per cent leased with a weighted average lease expiry of nine years. The portfolio is spread over Chicago, Dallas and Atlanta, with strong exposure to online retail, retail, and food and beverage tenants.

The initial portfolio has in-place rent of US$4.19 per sq ft per annum, translating into a going-in cap rate of 5.7 per cent. The remaining US$400 million development portfolio will be acquired in phases upon completion and full lease-up.

Its management expects this transaction to be funded by equity and debt. GLP's 10 per cent equity stake is likely to be funded by cash on hand and existing credit facilities. The group expects this transaction to generate a return on equity of 13 per cent, which would boost earnings marginally.

OUE

Broker: OCBC Investment Research

Call: Buy

Target price: $2.17

OUE has been conducting company share buybacks in the open market and has so far gone into the market on eight occasions to purchase some 1.05 million shares for $1.7 million. This translates to an average price of $1.58 per share.

These share buybacks are accretive to shareholders at currently undervalued share prices, particularly after recent encouraging sales at OUE Twin Peaks due to the group's marketing efforts and the implementation of a deferred payment scheme.

The sales at OUE Twin Peaks will significantly reduce the risk in the group's asset valuations.

Looking ahead, sales at Twin Peaks are expected to continue into the second half of this year. The group can also look forward to the completion of asset enhancement works at OUE Downtown, which is on track to be completed by the year end.

A version of this article appeared in the print edition of The Straits Times on September 19, 2016, with the headline 'Brokers' Call'. Print Edition | Subscribe