Stamford property investment continues to perform well

Target S$0.73



We recently met up with management and came away with the following takeaways.

1)The group’s Australian hotels continue to benefit from strong domestic demand with occupancies hovering above 80%, while room rates have inched up in tandem.

2) Management allowed the MOU for the sale-and-leaseback of three of its hotels to lapse recently as it wanted to maintain flexibility to pursue other monetisation options.

3) Revenue of its 87%-sold development project in Sydney was booked upon completion in 3QFY12, bringing in
S$195m of proceeds. Management continues to pursue re-development opportunities for selected hotel sites and is hopeful of obtaining approval to convert its North Ryde hotel into a residential project by mid- 2012.

4) Property investment continues to perform well, underpinned by lease income in excess of A$9m p.a. for its Perth office property.

Lapse of MOU a near term setback. While we view the lapsing of the MOU for the sale-and-leaseback of its three hotels (in Melbourne, Sydney and Adelaide) as a setback to efforts to unlock value from its hotel assets, management highlighted that the buyer had asked for additional terms over that originally agreed in the MOU and the deal was also contingent on the funding availability through an IPO. Under the circumstances, management opt to maintain flexibility to explore other monetisation options by allowing the MOU to lapse. STL’s hotels continued to perform well with improved occupancies and rates on the back of a buoyant Australian economy and strengthening of demand from the domestic corporate segment.

Hidden real estate value within hotel portfolio. STL acquired its hotels in the mid- 1990s at depressed prices when the Japanese corporates beat a retreat from Asia to repatriate funds back to Japan. Today, its hotels are sitting on substantial surplus of S$365m, or $0.42/share, on our estimates. Management is seeking to further enhance land value through re-development opportunities, beginning with the conversion of its North Ryde hotel in Sydney.

Buy maintained. We revise our FY12-13 earnings by -24% and +6% respectively, to factor in slower residential sales going forward as the remaining units in its Sydney project are larger units with high absolute quantum of A$10m each. Maintain BUY with a lower TP of $0.73, pegged to 35% discount to RNAV (vs 30% earlier).