Published October 5, 2009

Analysts need to get real

By VEN SREENIVASAN

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EARLIER this year, several research houses issued reports on listed premium property developer SC Global, warning that the company faced 'severe solvency risks'.

One house, in March, downgraded SC Global's price target to 30 cents. Another, in May, slapped SC Global with a target price of 28 cents, citing potentially huge write-downs amid an impending depression. Just months earlier, that analyst had a price target of $3.80 on the stock.

A third research house, in October 2008, wrote down 70 per cent of SC Global's value to arrive at a target price of 38 cents. Just two months earlier, the very same research house had SC Global's stock price target at $1.25, down from $1.60 a few months earlier.

Today, all three brokerages have target prices ranging from $1.63 to $1.95 per share. And further re-ratings could be in the works.

The wild gyrations in forecasts are, to say the least, breath-taking. More surprising are the sudden and dramatic reversals in view of the last two months.

Part of this was due to the easing in credit markets. Also, property values have risen some 20 per cent from their bottom as demand recovered. And despite recent government measures to cool the mass market, prices remain steady.

To be fair, analysts became skittish amid the combination of an impending global economic crisis and a credit crunch. The prospect of a meltdown on the property market was very real.

However, it wasn't the property market per se which triggered the sudden and sharp write-downs (or write-offs) of SC Global. It was the size of the company debt and gearing. The gearings of property players with investment properties tend to be measured in terms of debt/assets. This is true for the real estate investment trusts (Reits), and also for significant portions of the portfolios of many listed property developers here. But for pure property developers like SC Global, gearing is measured by comparing debt against equity.

Measuring its net debt of $1.42 billion against its total shareholders' equity of $576 million translates into a gearing of 2.46 times for SC Global. But when this debt is compared to its asset base of $2.38 billion, this gearing falls to just below 70 per cent. And this asset is developable land valued at cost.

While accounting conventions regulate how gearing is to be measured, these rules cannot be the sole determinant of the strength, solvency and survivability of a company. Depending solely on this single measure can cause alarm and panic, which was the case with investors who held SC Global's shares.

This is a company whose product, comprising some 900,000 square feet of landbank, is targeted at a high net worth market. A significant portion of its buyers tend to be foreigners who set up a second home in Singapore as it rapidly evolves into an Asian playground for the rich and famous. Units in SC Global's projects do not feature prominently in the sub-sale market. While the world's rich and famous lost lots of money during the crisis, they still remain the richest people by most measures.

Meanwhile, SC Global's unsold inventory of almost 400 units in projects such as the Marq, Hilltops and Martin No 38 place it in a strong position to capitalise on the unfolding high-end property market recovery.

While cash was king for property players during the dark days of the crisis, the new danger for property companies - especially for those wanting to be in the premium end of the market - is 'replenishment risk'.

This is because the supply of premium developable land in Singapore, particularly in the core inner city area, is fast shrinking. So in future, it is the size of one's landbanks which will separate the property men from the boys. If anything, SC Global, with its huge landbank carried at an average cost of $1,500 per square foot (psf), should command a scarcity premium.

The company has sold about 20 per cent of its inventory and is collecting payments progressively. Even if it sells another 20 per cent at just $2,000 psf (a conservative estimate for a company whose property fetched upwards of $3,500 psf), it would rake in enough funds to wipe out its entire debt.

Also, the issue of debt and solvency has to be seen in the context of the company's relationship with its creditor banks.

SC Global's debts are largely with the local banks which were never in any serious credit risk, and which have been quite comfortable with the company, its business model and its founder-cum-chief executive, Simon Cheong, himself an ex-banker.

While analysts have to rely on numbers, they also have an obligation to peer beyond their spreadsheets to take in the real operating circumstances of each company. As one wit put it, if you torture numbers long enough, they will give you the answers that you are looking for. And sometimes these answers can cause unnecessary alarm.