Lum Chang Holdings - An Established Asset-backed Contractor

VALUATION
Lum Chang (LC) is trading at 5.8x FY14 PE with a dividend yield of 5.1%.

INVESTMENT HIGHLIGHTS
S$1b orderbook. LC currently boasts a robust S$1b orderbook, which offers good earnings visibility for the next 2-3 years.

Reaping the fruits of London... Earlier this year, LC had sold one of its properties, and Kensington High Street - London, and registered a capital gain of 14% (above the acquisition cost) just two years after its purchase.

… and investing it back for the future. LC has announced the acquisition of another freehold property at Wood Street, London. While LC is expected to record a rental of only S$0.5m/year based on the group’s 70% stake in the property, we understand this is due to the current unfavourable leases (signed by the previous owners) which were significantly below market rates. Rental reversions for these leases are expected to be fully re-rated by 2020.

A potential crown jewel in the making. According to Carter Jonas, 1Q15 rental rates for Grade A offices at the City of London were £45.5-67.5 psf/year. As such, LC may see an attractive potential rental yield of 4.4-6.6% for its Woodstreet property, when all the leases are re-rated by 2020, and consequently prospective capital gains as well. This may also explain why some of LC’s directors have taken up the remaining 30% stake in the property.

Bumper profit year in FY16. LC also holds a 30% stake in the Twin Fountains Executive Condominium (EC) property development project. The EC project which has achieved more than 85% sales is expected obtain TOP in 2016.

Property-backed balance sheet. Including the recently acquired property at Woodstreet, LC’s investment properties amounts to a fair value of S$160m (S$0.42/share) as at 31 Mar 15. LC’s investment properties include: a) a shop unit at Kim Tian Road, Singapore, b) a light industrial building at Kung Chong Road, Singapore, (where about half of the building is classified under property, plant and equipment), c) 52-57 Prince’s square at London, and d) 130 Wood Street, London.

Healthy balance sheet. After adjusting for the acquisition of Wood Street and higher stake in its Malaysia associate, LC is expected to maintain healthy net gearing of 25% (net debt position of S$50m). Net gearing is likely to improve further when LC receives the remaining net proceeds (est S$30m) from the TOP of Twin Fountains in FY16-17, and dividends from its property development projects in Malaysia when it is expected to be completed in FY18-19.

Strong cash flow generation supports attractive dividend payout. Excluding acquisition of investment properties, LC has typically generated strong free cash flows of S$16-52m in the last four years, underpinning its ability to pay out dividends of 2 Scents/year from FY11-14, translating to an attractive dividend yield of 5.1%.


Technical Analysis
Daily Chart
Share price support from major shareholders. Since the start of the year, the directors cum major shareholders of LC have purchased nearly 2.6m shares (about 0.7%) from the market at S$0.36-0.375/share. (Read Report)

Source : UOB KayHian Research

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