GuocoLand launches new 5Y bond at 3.5% IPG

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This article first appeared on bondsupermart.com on 18 Oct 2021.

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GuocoLand Limited seems to be in good conditions with a healthy balance sheet and strong pipeline for 2022. We expect the final price guidance to be lower but at 3-3.3%, the coupon rate is fair for its credit ratios. This article takes a brief look at its FY20/21 results and relative valuation of the new notes.

About the bonds

These new bonds are fairly straightforward with no features. They are ranked unsubordinated and unsecured and issued from the SGD 3b Multicurrency Medium Term Note Program dated 28 Sep 2017.

About GuocoLand Limited

GuocoLand is the developer of the tallest building in Singapore – Guoco Tower standing at 290m. They also won the “Top Ten Developers Award” in the BCI Asia Awards for 2020 and 2021. Their main source of revenue is from development of residential, commercial and integrated properties and property investment. They have operations in China, Malaysia, UK and Australia but majority of the income comes from Singapore. GuocoLand also owns four hotels in Singapore and Malaysia.

FY20/21 Operating results ending Jun 21

For the full year ended 30 Jun 2021 (“FY20/21”), revenue decreased by 9% YoY to SGD 853.7m due to lower progressive recognition of sales from the Singapore residential projects as sales and construction of Martin Modern reaches its tail end, while the other projects are still in the early stages of construction. Gross profit margin remained stable at approximately 30%.

The group also recorded other income of SGD 138.9m, decreasing by 13% YoY due to a one-time gain from the sale of Guoman Hotel in Shanghai. Profit for the period increased by 122% to SGD 199.53m due to fair value changes. Adjusting for them and one-time gains/losses, the group made an adjusted profit of SGD 97.52m, an increase of 26.7% YoY compared to SGD 76.94m in FY19/20.

Credit profile

GuocoLand has a strong balance sheet with development properties of SGD 3.55b and cash balance of SGD 1.13b compared to trade payables of SGD 371.1m and current debt of SGD 947.4m, of which SGD 765.3m are unsecured. The group also has non-current debt of SGD 4.16b but SGD 3.71b is secured by their investment properties, development properties, and property, plant and equipment.

GuocoLand has a strong pipeline of projects for 2022. Guoco Midtown, which includes 770,000sqft of premium Grade A offices, retail space, two condominiums, and a five-storey Network Hub building, is expected to achieve Temporary Occupation Permit (“TOP”) in 2H22. GuocoLand is also developing a mixed-use development at Lentor Central and is expected to be ready for launch in 2H22.

Relative valuation

We compare GuocoLand to other local property developers such as Frasers Property, City Developments, OUE Limited and UOL Group. GuocoLand has better credit ratios than Frasers Property and City Developments yet its bonds have higher yields than them. GuocoLand is also more concentrated, with most of its revenue from property development whereas the other property companies are more diversified. GuocoLand is also smaller in asset size when compared to those two companies. These may be reasons to why GuocoLand has higher yield when compared to City Developments Ltd and Frasers Property Ltd.

Table 1: Credit ratios of OUE, OUECT and Suntec REIT

As of Jun 2021	Net debt/ equity (%)	Net debt/ total assets (%)	EBIT/ Interest expense (x)
GuocoLand Ltd	80.6	35.2	4.6
Frasers Property Ltd*	102.3	42.7	3.7
City Developments Ltd	98.0	37.0	0.8
UOL Group Ltd	28.7	19.8	8.7
OUE Ltd	40.6	30.6	2.0

Source: Bloomberg Finance L.P., iFAST compilations
*Frasers Property Ltd as of Mar 2021

At an initial price guidance of 3.5%, the below figures show that it is relatively attractive due to a couple of reasons. When compared to the OUESP bonds, the new issue has a slightly higher yield when compared to the OUESP 3.500% 21Sep2026 Corp (SGD). However, the earlier dated bonds do not show such a relationship. The GUOLSP yield curve is actually lower than OUE’s, thus GUOLSP’s new issue is likely to have lower yields too.

When looking at the I-spread, we see that the premium for GUOLSP’s longer duration bonds is mostly from the SGD swap offer rates (“SOR”) yield curve. The GUOLSP 2023 and 2025 has a spread of about 100 basis points (“bps”) but almost 90bps is from the difference between the SGD SOR. Thus, similarly for the new issue, we should not see such a high premium between the 2025 bond and the bond. As such, a final price guidance of 3.00-3.30% should be considered as fair for the new bond.

Figure 1: Relative valuation of comparable notes using YTM

Figure 2: Relative valuation of comparable notes using I-spread

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

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