Chip Eng Seg Case Study

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Introduction to Chip Eng Seng (CES)

Company Background

Chip Eng Seng (“CES”) is one of Singapore’s leading main contractors and property developers. Listed on the SGX Mainboard since 1999, CES started off as a subcontractor firm for landed properties in the 1960s. Over the years, it has built up its reputation for quality and reliability. In 1982, CES won its first HDB project as a main contractor. Because of its good track record, it was eventually awarded the highly coveted tender for the construction of Singapore’s highest HDB development for the iconic Pinnacle @ Duxton which was successfully completed in 2009. As at 5 November 2015, CES has a market capitalization of S$484 million.

CES’ core business is primarily in the areas of property
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For example, gearing ratio was 0.7 in 2012 but had risen to 1.3 in 2014. Nonetheless, interest coverage ratio seemed to be better in FY14 compared to FY13 because of the bumper profit in FY14. But compared to FY12, interest coverage ratio had worsened.

SWOT analysis

Strengths
1. CES has an established track record with more than 50 years of history. It has endured many economic cycles. Given its past experiences, CES should be well placed to face the current downtrend in property cycle in Singapore. Its construction track record was proven as seen in its wining of the tender bid and successful completion of the iconic Pinnacle @ Duxton.

2. It was the leader when it comes to innovation and market timing in the launching of property development.

For example, the Alexandra Central project was a retail mail integrated with hotel development. Not only did it manage to outbid its competitors by just a slight margin, it launched the sales of the Alexandra retail mall at the height of the retail commercial craze and almost all units were sold within one day in Jan 2013. The market timing was perfect as buyers were all turning to commercial property in the wake of new cooling measures in the residential
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CES is also diversifying into other new areas such as investment property and hospitality. Given the sluggish property market in Singapore, investment property and hospitality will help to boost the recurring income and enable CES to continue to dish out its baseline regular dividend of 4cents (or dividend yield of 6% ) in both good and bad times.

5. Share Price is very depressed relative to Net Asset Value (NAV). Given the poor sentiments in the property market in Singapore, CES has remained very depressed trading at around 65 to 70 cents since it hit a high of $0.985 in April 2015. CES RNAV (Revalued Net Assess Value) is estimated to be in the region of $2.00. With a current share price of only $0.665, it is greatly undervalued.

(See Annex B on the breakdown of RNAV of $2.00 for CES)

Weakness
1. Singapore’s property market is facing a cyclical downturn. Hence, there is a possibility that sales for new projects will be very slow. However to date, only Fulcrum remained largely unsold. However, Fulcrum is a small project and CES had intentionally held back until the project obtains its TOP in early 2016 before relaunching it again. Given its strategic location at the doorstep of a new MRT line, it would not be too challenging to sell off

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