Friday, June 1, 2012

Enticing aroma of Fragrance Group

Business Times: Fri, Jun 01
FRAGRANCE Group has been on a property buying spree in the past two months having picked up four development sites for a total of over $700 million: a 60-year leasehold industrial plot next to Aljunied MRT Station at a state tender; Tower 15 at Hoe Chiang Road, a 29-storey commercial tower that houses offices and Klapsons The Boutique Hotel; KeyPoint along Beach Road (in a 50:50 tie-up with Aspial Corporation's property unit World Class Land); and, just last week, Novena Ville.

This is an impressive flurry of activity, but you'd have to wonder - has the group bitten off more than it can chew, or could it pay off handsomely? Judging by the performance of its shares, some investors think the latter is possible - between October last year and April this year, its shares doubled from 26 cents to an all-time high of 52 cents. They then slid to 39 cents in early May following the stockmarket rout triggered worldwide by Greece's financial woes. Fragrance's shares have since recovered to 46.5 cents yesterday. Those who have been buying the firm's shares have every reason to be optimistic.

First, Fragrance is flush with cash following the restructuring of its economy-tier hotel business, which was floated under Global Premium Hotels (GPH) on April 26. It sold its portfolio of 22 Singapore hotels to GPH for $558 million, receiving the bulk of the payment amounting to $420.5 million in cash (comprising $74.8 million raised by GPH from its IPO proceeds and $345.7 million from debt and/or internally generated funds of GPH) and the balance $137.5 million by the issue of 549.99 million shares in GPH to Fragrance at 25 cents apiece. Fragrance now holds a stake of 52-odd per cent in GPH following an exercise of the over-allotment option.

A back-of-the-envelope calculation shows that the $420.5 million cash payment for the sale of the hotel portfolio, added to the group's $97.5 million cash and cash equivalents as at March 31, 2012, means Fragrance has a cash hoard of about $518 million.

Second, assuming the group has to pump in, say, a further $300-400 million to develop the four recently-acquired properties, the all-in development cost could amount to about $1-1.1 billion. With about $500 million in its kitty, the group should be able to fund the balance through debt and/or proceeds from the sale of units in the new development projects on three of the four sites. The industrial project on the Aljunied plot cannot be strata subdivided in the first 10 years after completion under government conditions stipulated for the site.

Much of course, depends on how much profit Fragrance can generate from the sites. For Tower 15, Fragrance has paid $360 million, or $1,420 per square foot per plot ratio (psf ppr) based on the 29-storey commercial building's existing gross floor area of 253,455 sq ft. On this basis, no development charge is payable. Some analysts say that appears pricey compared with $1,280 psf ppr and $1,270 psf ppr respectively that Oxley paid in second-half 2010 for two freehold properties along Robinson Road - Corporate Building (which is being redeveloped into Robinson Square) and Corporate Office (which is making way for Oxley Tower).

But then one could argue some appreciation in land values may be in order given that strata office and shop units have been selling like hot cakes - fuelled by strong demand from investors switching from the residential property sector and the equity market.

At Oxley Tower, which was launched earlier this year, the average price achieved so far for office units is $3,060 psf and retail/cafe units, $4,912 psf.

Fragrance could succeed in squeezing additional cashflow from Tower 15. Even as existing leases in the building - bounded by Hoe Chiang, Cantonment and Lim Teck Kim roads - continue to run over the next two years, Fragrance is working hard to get necessary approvals to launch units in the proposed redevelopment on the site possibly as early as year's end. In other words, it is eyeing a dual stream of cashflow initially from the asset - rental income from existing (mostly office) leases in the building as well as initial progress payment from buyers of units in the proposed redevelopment.

Fragrance has said it is exploring whether to do a residential, shop and office development, or a scheme with just shops and offices. For both schemes, it will enjoy cashflow in the form of progressive payment from buyers in accordance with the stages of the project's completion, though it can progressively recognise sales and profit only if it includes residential units in its development scheme.

For a pure commercial development, sales and profit on units sold can be booked only when the project is completed, under accounting rules. Much the same storyline could apply to KeyPoint and Novena Ville.

All-in, the group is boosting its exposure to other segments of the property market through mixed-development projects, which should appeal to stockmarket investors who may be concerned about being overexposed to the Singapore residential sector. In addition, through a majority stake in Global Premium Hotels, Fragrance continues to offer exposure to Singapore's buoyant hotel business.

The group could just shape up to be a stockmarket favourite - once equity market sentiment improves, of course...
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Team Marshe
Martin Koh/ Sherry Tang
9383-3992/ 9844-4400

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