SECOND CHANCE PROPERTIES (DMG)

BUY

Price S$0.38

Previous S$0.53

Target S$0.53

Revaluation gains expected to boost results

Higher than expected revaluation gains. Second Chance had announced that it expects to report a much higher YoY revaluation surplus on its properties in FY11. At our recent Corporate Day, management revealed that it recently acquired some office properties in 4QFY11. On top of that, its core business operations have been improving (9MFY11 EBIT was up 18% YoY), which is likely to continue into 4QFY11. We have raised our 4QFY11 earnings estimates to S$11.1m (previously S$5.3m), taking into consideration the higher revaluation gains. We expect Second Chance to maintain its high dividend payout of at least 3.8 S¢/share. Maintain BUY and TP of S$0.53, based on DDM methodology.

Adds office properties to its portfolio. Second Chance recently purchased a few office units at International Plaza and Middle Road for a total of ~S$13m (~5,300 sq ft in total). These properties are expected to yield an additional S$1m rental income.

Intends to focus more on real estate, but will keep its retail business. Management intends to focus on real estate activities, going forward. These could take the form of property developments (via joint ventures), developing and managing budget hotels (likely in Malaysia), acquisition of warehousing / storage space and picking up distressed properties. It is open to the type of real estate opportunities that may knock on its door. However, management intends to retain its profitable retail apparel and gold businesses.

Maintain BUY with TP S$0.53. We think management is likely to maintain its high dividend policy. Based on DDM methodology, we have a TP of S$0.53. At current levels, it implies an attractive dividend yield of 10%. Maintain BUY for a fashion retailer with an arm in property investment.