Stamford Land: Recycling capital, unlocking value (DMG)

(BUY, S$0.515, TP S$0.78)

Stamford Land (STL) is undervalued and trading at a steep discount of 56% to its SOTP valuation. We like STL for: 1) its quality assets comprising prime commercial and hotel properties in Australia; 2) resilient earnings outlook underpinned by strong hospitality earnings and development profits; 3) management’s efforts to unlock value through capital-recycling initiatives, which should narrow the valuation gap. BUY with a TP of S$0.78, pegged to 30% discount to our SOTP of S$1.12/share.

S&L deal highlights STL’s massively undervalued hotels. STL’s hotels are sitting on a surplus of S$365m over book value, or S$0.42/share, on our estimates. Management has, in the past, received numerous offers for its hotel portfolio, with one offer valuing its hotels at A$850m (S$1.1b). Recently, it signed an MOU for the sale and leaseback for three of its hotels: the Stamford Plaza Melbourne, Stamford Grand Adelaide and Stamford Plaza Sydney for an indicative consideration of A$316m. The sale price represents a 112% premium over its book value. On deal completion, STL will avail itself to cash proceeds of ~S$400m and continue to manage the hotels.

Record earnings ahead. On the earnings front, STL is poised to deliver a record year for FY12, as the group completes and recognises the profits from its flagship Sydney residential project, the Stamford Residences and Reynell Terraces. The project has been 90% pre-sold and with its completion in the current quarter, STL is on track to receive > S$200m sale proceeds. We expect its hotels to deliver steady earnings growth (EBITDA CAGR of 5% over FY11-13), underpinned by a resilient domestic corporate travel market and limited supply pipeline. Meanwhile, its recurrent income will be boosted by a full year’s contribution from its Perth office property.

Trading at steep discount to our SOTP valuation.STL is trading at a 54% discount to our SOTP valuation of $1.12. We believe this is overly steep given management’sability to unlock value and grow NAV through capital-recycling initiatives. Ascribing a 30% discount, we derive a fair value of S$0.78, implying a 52% upside. The counter offers a yield of 6%, with prospects for additional payouts upon a successful asset sale, in our view.