14 May 2011

Chip Eng Seng 1Q2011 Financial Result Review


Based on the recent release from Chip Eng Seng (Source: http://www.chipengseng.com/administration/NewsReports/76fe7ac1-b60e-47e2-81b0-24ea78993b09_Chip_Eng_Seng_1Q2011_Announcement.pdf), Chip Eng Seng has achieved a better result as compared to last year.

Summary of the result is showed as below:

1Q2011
1Q2010
COMPARISON
EPS
4.25
3.76
+13.03%
NTA
56.88
42.83*
+32.80%
ROE
7.47%
8.78%
-14.92%


According to CES,

‘Revenue increased from $20.2 million to $82.5 million as a result of revenue recognized progressively from sale of units in a 100% owned property development project, Oasis@Elias. The sales of units in the current period also contributed to the increase in revenue and gross profit.
Share of results of associates were mainly from two joint venture projects, Grange Infinite and Privé. The decrease was due to the absence of share of profits from The Parc Condominium and CityVista Residences which obtained TOP in 3Q2010.

The Group’s net debt/equity ratio was 0.61 as at 31 March 2011 as compared to 0.43 as at 31 December 2010. The increase was due to bank borrowings taken to finance the purchase of land for property development in Singapore and Australia.

Net current assets and non-current liabilities as at 31 March 2011 had increased compared to 31 December 2010. Net current assets increased mainly due to the land acquisition costs in Singapore and Australia. Non-current liabilities increased due to financing obtained for the land acquisition in Singapore and Australia.

As of 31 March 2011, the Group has $167.1 million in cash and cash equivalents, up from $133.6 million previously. This was primarily attributed to dividend income from its joint ventures upon the TOP of three joint development projects, The Parc Condominium and CityVista Residences in 3Q2010 and Grange Infinite in 1Q2011.

Including the current quarter profits, shareholders’ equity expanded from $348.3 million to $376.1 million. As a result, net asset value per share rose from 52.8 cents to 56.9 cents.’

My points here are:

1. CES is undergoing an expanding plan to acquire more land for its land banking reserve. With more landbanking in foreign countries (e.g. Malaysia and Australia), we can foresee that there is a more aggresive plan to oversea.

2. Current CES business model are combination of Construction and Property Development. Although it is currently under Construction category, but with more revenue and profit comes from property development division, I believe it can achieve a higher overall net profit margin and also create a public awareness through marketing activities (e.g. we can see a surge in Marketing expenses in 1Q2011 as compared to previous year).

3. If we treat CES as a property development company instead of construction company, it is currently undervalue at 2.7 PE ratio. It is a surprise that we are hardly find any other company which is having such a low PE ratio in SGX.  With a 4c dividend payment, it translates to a decent 7%-9% dividend return.

4. There are still risks here: With a relatively small market capitalization value as well as the equity value, there is a demand of higher premium to encounter the small cap risk and liquidity risk. As a retail investor, however, we do not see this is as an obstacle, but we can diversify this investment with other combination of companies.

5. Another risk involved is the business cycle. As CES involves in Construction and Property Development field, we have to be aware of the business cycle of both industries. Singapore government is implementing more tightening monetary policy in the midst of curbing inflation caused by food, commodities & property. With more foreign investors especially from China are investing all over the world including Singapore, we can foresee more actions will be taken up by Singapore government.

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