25 February 2014

Chip Eng Seng - Generous 4 Cents Dividend Maintained FEB 2014

Background of the Company

Chip Eng Seng Corporation Ltd (“Chip Eng Seng” or the “Group”) is a leading construction player in Singapore and has been listed on the Mainboard of the Singapore Exchange Securities Trading Limited (“SGX-ST”) since 1999. The Group is principally engaged in the following key business segments which comprise Construction, Property Development and Investments and Hospitality.

Founded by Executive Chairman, Mr Lim Tiam Seng, Chip Eng Seng started as a subcontractor firm for conventional landed properties back in the 1960s. However, the Group soon made its mark by making a 
successful foray into the public housing market in 1982 after being appointed as the main contractor in its first
Housing and Development Board (“HDB”) project. 

Today, backed by more than 30 years of experience, Chip Eng Seng has earned itself a strong reputation and track record in the construction industry. In particular, the Group’s proven capabilities in design-and-build projects have established Chip Eng Seng as a leading main contractor for public and private construction projects alike.

The Group’s construction business is undertaken by Chip Eng Seng Contractors (1988) Pte Ltd (“CESC”) and CES Engineering & Construction Pte Ltd (“CESE”) while CEL Development Pte Ltd (“CEL”) oversees its property investment and development division.

Company Fundamental Highlights:
No. Outstanding Shares: 646,817,161
Shares Price: S$0.73
Market Cap: 446,303,841
NAV: S$0.7712
P/B Ratio: 0.8947
Annualized EPS: S$0.1134
Annualized PE Ratio: 6.3030
DPS: S$0.04
Dividend Yield: 5.59% 

Company Financial Highlights

Company Performance Snapshot. Source: Company
Company achieved S$73.4M net profit on the back of Revenue S$502.5M. The FY2013 EPS was 11.3 cents and NAV was 77.1 cents. As the company declared a 4 cents dividend this year, the dividend yield based on current share price is around 5.5%. The ROE was around 15%, which is still good in my view. 

Nonetheless, we could do thorough analysis via the report released by the company here. 

1st. Below is the snapshot of segment result:

Segement Report. Source: Company
As you could see from the chart above, the Profit Before Tax margin dropped significantly in both construction and property development division (5.9% and 10.1% respectively if we exclude share of result of associates from property development division and before take into consideration of eliminations of inter-segment sales). S$13M net fair value gain on investment properties would be treated as non-recurring income to the company, as the net fair value gain is calculated on annual basis. Nonetheless, we could expect additional income from Hotel division as the Alexandra hotel is expected to be completed on 2015 which is expected to bring in annual revenue of S$18M (based on calculation of average room rate S$200, average 200 occupancy days per room per year, 450 rooms after hotel construction is completed). 

2nd. Below is the snapshot of ongoing projects

Source: Company, Jack Phang Estimation
As there are several COC projects to be completed on financial year ended 31 December 2014, I would expect a total net profit of at least S$100M Profit Before Tax this year. I think the Company could achieve PBT of S$100M on FY2015 as Alexandra Central / Alexandra Hotel are expected to be completed on FY2015. 

Fulcrum, a high end project undertaken by company targeted to be completed by FY2015 only achieve 13% sales so far. The Tower Melbourne project could be delayed although it has achieved a nearly 100% bookings far. 

As the company started to venture in Australia, we may understand that it may face currencies risk as well as business risk there, as the operating environment is different from Singapore as the company may face the challenges to fight against the currently depreciating Aussie dollar as well as cash flow on the projects there as the company could only recognize the revenue and profit once the project is completed. Nonetheless, I think it is still a good move to venture oversea especially during peak property market in Singapore as it is harder to get land bank here at reasonable price. 

As most of the projects are targeted to be completed by 2015, I am a little worry that the company may take a half time break, to wait for the property market to cool down further before it started another capital recycle/reinvestment activities on year 2015. 

My personal view is that, if you are having a long term investment period (more than 3 years) and hope to achieve high dividend yield via long term investment irregardless of the shares price movement, then Chip Eng Seng would be one of your choices here and you may accumulate it while the property market remains weaker. 


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