DBS initiates 'buy' on GuocoLand as it looks to benefit from the office market recovery

A potential securitisation of GuocoLand’s income-producing portfolio is one way to drive the property developer's share price: DBS

DBS Group Research has started GuocoLand with a “buy” recommendation as it sees the counter as a “multi-bagger play on value unlocking”.

Analysts Derek Tan and Rachel Tan have also given the SGX-listed property developer a target price of $2.30, which is based on a “conservative” 60% discount to its revised net asset value (RNAV) of $5.70.

In their report dated April 5, the analysts see GuocoLand as being a play into future-ready living.

The property developer has development projects that are located in Singapore, Malaysia and China, which are built to accommodate the rising expectations of comfort and convenience.

The properties are also located in strategic urban areas, which could appeal to homebuyers who’re riding on the flight to quality trend, note the analysts.

“As flexible working arrangements such as the new hybrid work-from-home (WFH) trend becomes the normal in a post-Covid-19 world, we think that buyers would be more inclined towards quality residential developments that exhibit an efficient use of space with supporting amenities that offer a work-live-play lifestyle,” they write.

“GuocoLand’s development properties are built around the future lifestyles of people and accommodate their rising expectations of comfort and convenience. Further, as borders reopen, we also anticipate foreign demand to return for private residential properties in Singapore, especially in prime locations,” they add.

Further to this, the analysts see GuocoLand’s positive sales momentum to continue as it caters to both local and foreign demand. “[This is likely to drive] revenue CAGR of 19% from FY2021 - 2023 for this segment that contributed 84% to FY2021 revenue,” they say.

In addition, GuocoLand is likely to benefit from the upcoming office upcycle.

“We believe that the flight to quality trend will lead the office market recovery in Singapore. GuocoLand is well-positioned to capitalise on this trend, given that Guoco Midtown is the only source of new supply of CBD Grade A office space in Singapore in 2022-2023,” the analysts note.

“This is on top of positive rental reversionary trends expected for Guoco Tower in a tight supply market. There is a potential upside to our earnings from the revaluation of Guoco Midtown that we have yet to factor in,” they add.

At its current share price, GuocoLand is trading at an attractive P/NAV of 0.4x and offers decent FY2022 and FY2023 yields of 3.9% p.a., note the analysts.

One way to crystallise value would be the potential securitisation of GuocoLand’s income-producing portfolio or conversion into a “stapled security”. The move, say the analysts, could be a “significant share price catalyst” with potential upside ranging from 50% to 100%.

On the other hand, potential key risks include a slowdown in the economy, weak sentiment, a faster-than-expected increase in interest rates, as well as regulatory risks.

Shares in GuocoLand closed 11 cents higher or 7.19% up at $1.64 on April 5.

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