Month: May 2012
Cambridge – DMG
A sale not to be missed
Earlier this month, CIT announced the desire to sell their industrial property at Lam Soon Industrial; a 230,915 sq ft freehold site located at Hillview Avenue. At that time of announcement, management was unwilling to provide a target selling price as various hurdles, including convincing other owners to sell, have to be overcome before the sale could be moved forward. However, we speculate the sale of this site to be progressing as CIT, who currently owns c.69% of the building, has officially put the site up for sale on 23rd May 2012. With an indicative pricing of S$330m (equivalent to S$925 psf after including a development charge of S$80m), we view this sale positively as the target selling price is 3.7x the valuation of the property as at December 2011. Reiterate BUY on CIT with a DDM-based (COE: 10.7%, terminal growth: 1.0%) TP: S$0.605.
Site most likely to be sold to developer. Under the 2008 master plan, the Lam Soon site is zoned for “residential” use with a gross plot ratio of 1.92. Although there are strong demands for light industrial space in Singapore, given that the vicinity of Hillview had been developed into a residential area, together with further infrastructure development including the upcoming Hillview MRT station scheduled to be completed by 2015, we expect the site to attract strong interest from residential developers. At the moment, we believe this site can be redeveloped into a 10-storey residential development comprising 370 apartments fetching an average of S$1200-1400 psf.
Sale could improve both gearing of the company and inspire further growth. With an estimated cap rate of 4.7% on this building and assuming the transaction to be completed in 4Q12, we estimate a loss of approximately 1.6% of CIT gross income from this sale. However, with the proceeds from this sale, it gives the trust a significant warchest of capital for future acquisition of higher yielding industrial buildings for its portfolio. Reiterate BUY on CIT with a DDM-based (COE: 10.7%, terminal growth: 1.0%) TP: S$0.605.
CDL H-Trust – DBSV
Earnings growth momentum to continue
• Robust prospects for Singapore tourism in 2012
• Positive data points for CDL HT
• BUY, TP adjusted slightly to S$1.99 based on DDM
Singapore – a destination like no other. The value proposition in Singapore’s tourism sector has greatly changed (with the opening of the two integrated resorts, Universal Studios and various shopping destinations) since 2009. Before that, most of the country’s key attractions had not yet opened. Singapore’s main visitor market source remains largely within the Asia-Pacific region (contributing close to 88% of total visitors in 2011 vs 85% in 2010), enabling the country to leverage on the strong intra-regional demand for leisure and business travel. With a slew of new attractions and a strong line-up of MICE events in the coming months, we expect Singapore to remain one of the hot destinations to visit in 2012.
Strong demand for accommodations, from MICE, to benefit CDL HT in 2012. We anticipate strong demand from the MICE sector, with a strong line-up of events in the coming quarters. In addition, the peak tourist periods of 2Q-3Q are fast approaching, and with the annual school holidays and the Formula One race in September, we expect CDL Hospitality Trusts (CDL HT) to continue to deliver sustained earnings growth on a q-o-q and y-o-y basis, fueled by the already high average occupancies of close to c.90%.
Any acquisition will be an upside surprise. CDLHT’s low gearing of 26% gives them debt-funded headroom to acquire. If any is made, this will be an earnings upside surprise as we, and the market, have not factored in any numbers.
BUY, TP raised slightly to S$1.99. While the stock has been re-rated close to c.5% after our recent upgrade, we remain optimistic given the strong underlying fundamentals for the hotel sector in the coming quarters. With an attractive FY12-13F yield of close to 7%, we maintain our BUY call with TP revised slightly as we raised our RevPAR assumptions slightly in the forward years.
ART – OCBC
EUROPEAN MASTER LEASES TO UNDERPIN STABILITY
•Defensive master leases in Europe
•Debt maturity well spread-out
•Balanced currency exposure
European master leases to underpin stability
Despite ongoing uncertainty in Europe, we believe that income from ART’s European assets would be underpinned by master leases arrangements in the 17 properties in France and two in Germany, which contributed a total of 26% of gross profit for 1Q12. In addition, management contracts with minimum guaranteed income are in place for seven properties in Belgium, Spain and the UK, which contributed 12% of 1Q12 gross profit.
Bulk of European asset value in prime locations
In terms of asset value exposure, 40% is in Europe of which the bulk is spilt between France (21%) and the UK (15%). Four of 17 French properties in the prime regions of core Paris make up about half of total French exposure. Similarly, in the UK, all four properties are in prime London locations – South Kensington, Trafalgar Square, Convent Garden and the Barbican respectively. This being so, we believe their book values would be relatively resilient and unlikely to suffer long term capital value deterioration.
Debt maturity profile remains healthy
The balance sheet remains healthy with gearing at 41.6% of as end Mar 12. In addition, the debt profile of ART is also relatively well spread-out, with 19%, 9% and 23% of total debt (S$1,170.2m) due in 2012, 2013 and 2014, respectively. Currency exposure is also balanced – with 26%, 32% and 29% of total debt is denominated in SGD, EURO and the JPY, respectively, with the remainder in the Sterling Pound, USD and AUD. Interest coverage is at 3.6 times.
Maintain BUY
With an attractive yield of 7.9%, we continue to see value in the share price. Also, an undemanding P/B ratio of 0.8x would translate to a reasonable margin of safety for bear case write-downs. We maintain our BUY rating with an S$1.14 fair value estimate.
Retail REITs – DBSV
Staying on top of the game
• Stronger earnings growth from 2H12 as AEI works bear fruit
• Healthy pre-commitment rates with strong tenant mix to continue to drive strong organic growth
• Top pick – CMT for its strong earning visibility
Better performance from 2H. Competition for the consumer dollar over the last two years has prompted landlords to undertake refurbishment and repositioning initiatives to remain competitive and relevant to changing consumer taste. As the malls move towards the tail end of their development schedule, we believe the gradual completion of AEI, coupled with the positive rental reversions, should support strong FY13 DPU growth of 6% y-o-y for the retail reits vs the other reit sectors. More importantly, we note that malls that have post AEI works are able to achieve higher average annual rental growth of at least 8% vs the average reversionary rental reversion of 2-3% p.a.
Reaping the benefits of AEI works. Supporting our positive outlook is the strong earnings growth of 15-16% q-o-q for FCT’s 2Q results upon the completion of Causeway Point’s AEI works (Phase 1) in Dec 2011. CMT’s JCube, which opened in April this year, was almost 100% occupied and we should expect higher contribution from 2Q onwards. Our recent visit to Causeway Point and JCube malls also reaffirmed the REIT managers’ asset enhancement execution ability. We were impressed with the mix of tenants that the malls have brought in and the higher foot traffic they attract.
Attractive tenant mix supports healthy rental reversion and pre-commitments. We are pleased that reit managers have traded up the mall’s tenant mix featuring new-to-market brands and concept stores. Meanwhile, some of these malls will also see higher F&B components upon the completion of the AEI works. We like this strategy because popular F&B joints are high yielding tenants, much like fashion retailers. They also double as crowd pullers. This would enable landlords to drive rental reversion and occupancies in the longer term. Apart from that, leasing activities have been healthy resulting in strong leasing pre-commitments of >70%, way ahead of the AEI completion dates.
Stock picks. We continue to like the retail reits for its visible earning drivers and low earning volatility, backed by the more resilient nature of nondiscretionary consumption. Within this space, we like CMT (BUY, TP S$2.05) for its strong earning visibility. We expect the AEI works that are completing progressively to underpin earning growth, while proceeds from its recent divestment of Hougang Plaza could be deployed to higher yielding sources.
CDL H-Trust – OCBC
BENEFITTING FROM FOCUS ON QUALITY TOURISTS
•Doubling GDP contribution
•Quality tourists and high-end hotels
•Slower supply growth for high-end hotels
Growing influence of hospitality
We think it is notable that the Singapore Tourism Board (STB) is targeting a possible doubling of tourism’s GDP contribution to 8%. In 2011, tourism accounted for 4.1% of GDP, substantially higher than the 3.6% in 2010 and 2.4% in 2009. In 1Q12, real GDP grew 1.6% YoY while the Accommodation & Food Services sector (a rough proxy for tourism) grew faster at 4% YoY. For 2012, STB is aiming for S$23-24b in tourism receipts, implying a 3.6-8.1% YoY increase. The target growth rate, which STB has indicated could be revised upwards, is significantly higher than the official 2012 GDP growth forecast of 1-3% and highlights the increasing importance of tourism.
Stronger performance for high-end hotels
The STB has recently highlighted that it wants to focus on attracting quality tourists who spend more, as opposed to simply trying to grow the absolute number of tourists. This emphasis will probably continue to benefit high-end hotel players like CDLHT. For 1Q12, tourist arrivals jumped 14.6% YoY to 3.5m. Based on preliminary figures, high-end Singapore hotels showed RevPAR growth of 14.5% in 1Q12, outperforming budget hotels (+5.5% YoY). The robust RevPAR growth for high-end hotels was supported by larger increases in rental rates. We believe that our 7.5% RevPAR growth rate assumption for CDLHT’s Singapore hotels in 2012 is not aggressive.
Favorable supply dynamics for high-end hotels
Updating our in-house hotel database, we forecast that overall hotel room supply will increase by 3.7% p.a. for 2012-2015, comfortably outstripped by hotel room demand growth of 6.4% p.a. High-end hotel room supply will grow by 3.0% p.a., slower than the 5.3% p.a. for budget hotels. The temporary closing of Pan Pacific Singapore for renovations from Apr to Aug has also taken 778 high-end rooms off the market.
Maintain BUY
We maintain our BUY rating on CDLHT and our RNAV-derived fair value estimate of S$2.04.