Why DBS remains cautious on Chip Eng Seng despite Kampong Java site win

SINGAPORE (Jan 17): DBS Group Research is forecasting property transaction volumes to fall 20% y-o-y to 7,500-8,500 units in 2019, and says it is possible for the property price index (PPI) to decline by up to 3% this year, and even further, should macro conditions worsen.

The research house currently has a “hold” call on developer Chip Eng Seng (CES) with a target price of 75 cents, which has yet to factor in the group’s ongoing acquisition of a land parcel at Kampong Java.

CapitaLand and Frasers Property, on the other hand, are its top sector “buy” picks with the respective target prices of $3.62 and $1.98.

To recap, two residential government land sales (GLS) tenders for Kampong Java Road and Tampines Avenue 10 closed yesterday, with CES bagging the former site with a bid of $418 million or $1,192 psf ppr.

Both sites will add a total of 1,000 units to upcoming supply in 2020.

In a Thursday report, analyst Rachel Tan notes that CES’s winning bid price is about 20-25% below that of Makeway View and Chancery Court in 1H18, which is the last en-bloc within vicinity.

While this is in line with previous DBS estimates that land bids could fall by some 20% following the larger minimum average unit size, Tan highlights that the winning bid price appears to be flat on a quantum basis.

“Our cautious view [on CES] is mainly predicated on the uncertainty over sell-through rates for the upcoming Changi Garden site in 1H19 and the step-up in gearing levels post the acquisition of the Kampong Java land parcel, which could hamper plans to bring its budding education business to a meaningful scale,” says the analyst.

Going forward, Tan believes the odds of achieving strong sales during launches are against developers, as residential prices and volumes look set for a downtrend this year as close to 40,000 units are ready for launch in a slowing market.

“All eyes on official launches of Fourth Avenue Residences and RV Altitude this weekend to gauge buyers’ sentiment and upcoming GLS tender [for Sims Drive and Middle Road sites] in March 2019,” she adds.

As at 11:28am, shares in CES are trading flat at 70 cents, while CapitaLand and Frasers Property are trading at $3.31 and $1.74, respectively.