Guthrie GTS Limited Victor Portfolio Management Wai Yeong Choun Victor 21 August 2012 Recommendation Source: Yahoo Finance BUY Pros - Changing consumer patterns from city shopping to heartlands - Managing Singapore mall retail space equivalent to approx. 16% market share - Well-positioned for expanding engineering solutions business - High but sustainable dividend yield - Strong corporate governance Cons Ticker G33 Exchange Singapore Stock Exchange - Standstill engineering operations Industry & Sector Property and Commerce at Abu Dhabi (a major project) Market Capitalization S$ 619,814,195 - No guarantee of exponential fair 52-wk Price Range S$ 0.42 – S$0.70 value gains Recent Price S$ 0.575 (17/08/2012) - Leisure business segment subjected to high competition Net Asset Value S$ 0.930 (30/06/2012) Current P/E 5.88x Projected 2014 P/E 4.05x Intrinsic Value Dividend Yield 9.57% Benchmark FTSE ST RE Investment Trusts S$ 0.88 Listed Peers CapitaMall Trust, Frasers Based on Discounted Cash Flow (DCF) Centrepoint Trust Upside potential: 53% 1. Business Summary The Guthrie Group’s brand name and origin dated back to 1821 when it was founded by a Scotsman, Alexander Guthrie. Between then and 2007, the group engaged in a diversified business which included trading. Since 2007, Salim Group and Putra Masagung, CEO and Chairman, jointly hold majority stake in Guthrie GTS. Currently, the Guthrie Group has diverse interests in several industries both locally and in the Asian region. Its 3 main activities are Property Investment & development, engineering and leisure predominantly in Singapore and Indonesia. 1 2. Industry Overview 2.1. Property Development and Management The Property division of the Group has two mainstream activities which are the ownership of commercial and residential assets as well as retail mall management. Some of its investments include a stake in Jurong Point Shopping Centre, the Heartland-Mall Kovan, the new Tampines One and the Jurong Point Shopping Centre 2 cum Centris condominium project. It also provides mall management services for Tiong Bahru Plaza, Century Square, Hougang Mall, White Sands, Liang Court and Central Plaza. Wisma Nusantara, a 30-storey office tower in Jakarta, Indonesia is owned by the Group and in Singapore its flagship commercial property is Guthrie House. Despite government efforts to cool property demand, property price indexes of residential, office, retail and industrial properties hover near their respective historical highs.1 Recent key real estate statistics released for 2Q2012 suggest that property markets are cooling, but at a slower pace than expected. Further decline in residential prices is highly likely, considering the highest ever recorded supply pipeline of 83,251 private residential units, of which about 46% remains unsold as of 2Q2012. Furthermore, in Dec 2011, the government, in a bid to cool investment demand, raised stamp duties for foreign buyers and 2nd home purchasers. Negative impact on property prices include tightening on immigration policy. Collectively, profit margin for this sector is likely to weaken for developers. The coming wave of business opportunities should be on construction and redevelopment of existing infrastructures. Multiple factors such as geographical position, supply of human and technological resources and pro-business environment make Singapore a desirable location for small- medium enterprises to grow, as well as a prime target for multinational companies to set up regional office here. Given the tight supply of office space in CBD and central Singapore, the high office rental rate would drive cost-conscious smaller companies seek offices outside central region but with easy accessibility across Singapore and to the airport. As can be seen in Chart 1, office and retail spaces remain tight in Singapore market. 1 URA, July 27, 2012, Property Price Index by Type of Property, http://www.ura.gov.sg/pr/graphics/2012/pr12-79a6.pdf 2 Chart 1: Occupied Commercial Properties In Thousand sqm Nett 8 7 6 5 4 3 2 2010 2011 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 Occupied Office Space Available Office Space Occupied Shop Space Available Shop Space Source: URA, Jul 2012 Shopping and dining out are activities much-enjoyed by Singaporeans and tourists alike. Instead of going to city center, retail malls at the heartlands boost many international and established brands. These malls offer similar dining and shopping pleasures. Characteristics of a mall with high volume of visitors include location near MRT station, having multinational retail brands and restaurants at the heartland mall, themed events, highly-maintained washrooms and spacious walkways. With good visitation, mall owners could collect higher rental revenue from leasing shop spaces and a percentage of sales made. As more heartland malls are being built, the success of a mall is likely to be determined by the management of a mall to source for unique stylized events, over and above managing turnover of tenants. 2.2. Engineering The Group's Engineering arm is well-established in its field. It has an extensive track record in the mechanical and electrical (M&E) engineering domain and offers diversified products and services to the industrial, building and infrastructure sectors. It has provided engineering products and services to many public and private enterprises. Upgrading of existing infrastructures and new construction works remain robust in Singapore as increasing emphasis is placed on developing efficient and environmentally sustainable projects. Such infrastructure demands drive Singapore engineering landscape to innovate. Leveraging on experience, local engineering companies may take on projects overseas to expand their expertise regionally. According to EDB Factsheet 2011, engineering services accounts for 1.2% of Singapore’s GDP and the sector is expected to grow 5-6% 3 annually till 2020.2 Non-process engineering and architectural services such as installation of wall partitions, electrical and power cable transmissions are likely to remain strong, given the pressing demand for technologically-efficient buildings and urban living solutions. 2.3. Leisure The Leisure division owns several hotels and a golf resort in the region. In Indonesia, its hotel assets are the Hotel Nikko in Jakarta, the Novotel Coralia Benoa in Bali and the Indah Puri Golf Resort in Batam. The Group also owns the Novotel Vientiane in Laos. The global tourism landscape is likely to contract given the pessimistic macroeconomic outlook as Eurozone sovereign debt crisis and US fiscal cliff play out. However, intra-regional tourism in ASEAN is well-supported as the cost of travel between cities becomes increasingly affordable to suit different categories of travelers. With the exception of Malaysian tourists, currency exchange rates had helped in our tourism receipts from other nationalities, according to 1Q2012 data released by Singapore Tourism Board (STB). 3 Evidently, occupancy in gazetted hotels across most of countries also shows year-on-year increase from 2010.4 3. Porter’s Five Forces Guthrie has 3 main distinctive revenue reporting units. Each revenue reporting unit faces different competitive strengths and weaknesses, as a whole, I would attempt to assign a rating to each of the five forces below. Rivalry among Existing Competitors: Med- Strong Singapore land area is small but has many established property developers such as City Development and Keppel Land. Guthrie is relatively new to property development arena with project DBSS Adora Green at Yishun, generating a return on capital of about 9.63%.5 Similar DBSS project at Bedok Belvia by seasoned CEL Development has an estimated return of 2 EDB, Engineering Services Factsheet 2011, http://www.edb.gov.sg/etc/medialib/downloads/industries.Par.47067.File.tmp/Engineering%20Services%20Factsheet.pdf 3 STB, First Quarter 2012. Malaysians Tourism Receipts to Singapore fell 11% while overall tourism spending upped 7% y-o-y. https://app.stb.gov.sg/Data/news/3/c7f1734f2e7b3ea403e447de4a566ed2/tourism%20performance%20quarterly%20report%20- %20q1%202012.pdf 4 Ministry of Tourism and Creative Economy using Central Statistic Board Figures, Indonesia, Dec 2011. Average Bali, Jakarta and Riau Archipelago classified hotel occupancy increased 3.65%, 2.06%, 3.41% from 2010, respectively. http://www.budpar.go.id/userfiles/file/RORDec2011.pdf 5 Cost of project is $340m and expected revenue (from 168 x $350k, 510 x $470k, and 128 x $580k) is $372m. AR2010 and www.adoragreen.com.sg 4 9.25%.6 As housing supply increases in the coming years, profit margin for this segment would likely be driven lower. Guthrie competes in the office and retail space rental in which they face strong competitions from Frasers Commercial Trust, Lend Lease and CapitaMall Trust (CMT). With Singapore’s retail mall space estimated to be at 24.3 million sqf 7 , Guthrie manages (direct/indirect) approximately 4 million sqf. In the same report, it was estimated that CMT manages 16.6% of all major shopping centers in Singapore. While CMT and Guthrie have different niches- central and heartland respectively, it is likely that CMT recognizes the shift in retail spending geography to the heartlands and starts gaining market share in the heartlands. Separately, Frasers Centrepoint Trust manages many heartland malls and is a larger player in this field than Guthrie. For the Leisure business, Guthrie recognizes strong competitive environment in their overseas properties, in particular Indah Puri Batam Golf Resort. New entrants and existing competitors are eyeing a piece of the emerging middle class golfers and an aging affluent class. Its leisure properties targeting business travelers at Jakarta, Bali and Vientiane is likely to face stiff competition as many existing hotels and resorts offer business facilities. Threat of New Entrants: Low- Med Strong barriers exist for new entrants. A new entrant would have to convince the owners of its ability to generate a steady and attractive property income. Being able to undercut existing mall managers in management fees may not be convincing for the owner as inexperienced or failed mall management is costly.