Lian Beng Group: Launching sale of industrial building (DMG)

(BUY, S$0.36, TP S$0.71)

Lian Beng Group (LBG) is launching the sale of its freehold industrial building at Mandai and developing part of the plot of land for a workers’ dormitory. LBG, with an effective stake of 55% in the Mandai property, would likely secure the two construction contracts. We estimate LBG’s earnings to be boosted by ~S$1.8m each year from the dormitory (excluding any management fees payable to an external party for managing the dormitory) and ~S$2.7m from the sale of its units in the industrial building (assuming 100% sold). However, we are not adjusting our earnings estimates at this point in time as any significant contribution would probably kick-in only from 2H 2012. Trading at a mere 3.6x prospective P/E, we believe it has the capacity to trade up to 7x for a TP of S$0.71. Maintain BUY.

Launching industrial building units for sale and developing workers’ dormitory. In 4Q 2011, LBG will be launching the sale of its industrial building units located on part of its S$67m, 200k sqf Mandai property, of which it owns 55%. In addition, LBG is developing another portion into a 4,700-bed workers’ dormitory. The development plans for the third parcel is yet to be confirmed. The usage of the land is as follows: dormitory ~42%, industrial building ~37% and third parcel ~21%.

Earnings impact. Based on 45% net margins (the 3-year historical average of its JV partner Centurion Corporation), a 70% occupancy rate and S$180 rental rate per worker per month, we estimate LBG’s earnings to grow by an additional S$1.8m per year from the dormitory business. This excludes any fees payable to the dormitory operator to manage the facility. For its industrial units, assuming asp of S$650 psf and costs of S$583 psf, we estimate earnings arising from the project to come in at ~S$2.7m on 100% of the units sold. In addition, LBG is likely to secure the construction project of the facilities.

Attractively valued at 3.6x FY12 P/E. Construction of the dormitory and industrial building would only be only be completed within 12-15 months and 15-18 months respectively. Any significant contribution from construction is likely to kick-in from 2H 2012. Thus, we are maintaining our earnings estimates for now.