Month: April 2007
FrasersCT – OCBC
Downgrade on valuation
2Q was better than 1Q07. Frasers Centrepoint Trust (FCT) reported 2Q07 revenue of S$19.6m (+1.9% QoQ) and distributable income of S$10.3m (+8.7% QoQ). Distributable income per unit (DPU) came in at 1.67 cents (1Q07: 1.54 cents). The better results were due to higher turnover rent (as a result of the Chinese New Year period), better reversion in rental rates, higher casual leasing and lower costs. FCT also benefited from S$0.198m from its sponsor as a result of the revamping of Anchorpoint.
Tweaking forecast. With tighter cost control and better operating matrix, we are adjusting our FY07F DPU from 5.95 cents to 6.31 cents, but maintaining FY08F DPU of 7.57 cents. Growth will come from its acquisition pipelines; namely Centrepoint, Northpoint 2, Yew Tee Point and Bedok Mall. The latter will be redeveloped by FCT’s sponsor, Fraser Centrepoint Ltd (FCL). In terms of timeline, Northpoint 2 and Yew Tee are likely to be acquired by late 2008 with the Bedok site probably in 2010. We do not expect any funding issue as FCT has recently obtained a credit rating, meaning that its current gearing of about 27% can be raised to 60%. This translates to a war chest of over S$300m.
Asset enhancement starts in 2Q07. FCT has scheduled Anchorpoint Shopping Centre (ASC) for reconfiguration in May 2007. It intends to reposition ASC as a food mall and work is expected to be completed in 6 months. Beyond ASC, asset enhancement works (AEW) are likely to be carried out at Northpoint and Causeway Point. These latter projects are likely to have greater impact on FCT’s earnings due to its significantly larger size. However, we do not expect the completion of AEW at Causeway Point until 2008.
Downgrade to HOLD. FCT has done very well, rising over 65% above its IPO price and surpassing our fair value of S$1.59. The current price means that dilution from new units will be less. This in turn has a positive impact on our valuation. We thus raised our fair value estimate to S$1.67. At current trading range, FCT’s P/B is high at about 1.6x and trading yield is low at only about 3.7%. While we continue to like FCT for its exposure to the retail sector, strong asset enhancement possibilities and clarity in acquisitions, at current valuation, FCT no longer looks compelling. We thus downgrade our rating on FCT from BUY to HOLD.
CMT – OCBC
Buys CapitaRetail Singapore
Slightly better than expected 1Q. CapitaMall Trust (CMT) reported a fairly good set of 1Q07 results with revenue rising 1.0% QoQ to S$97.4m. Distributable income growth was better, rising 7% QoQ to S$51.5m with distributable income per unit (DPU) coming in at 3.0 cents. The stronger performance was attributed to better rates for new and renewed leases. For the period, CMT also benefited from lower operating expenses by about 5.2% QoQ. The lower cost was due to high base effect in 4Q06 as a result of one-off marketing and maintenance expenses incurred at Plaza Singapura.
Buying CapitaRetail Singapore. Separately, CMT also announced that it will be acquiring CapitaRetail Singapore (CRS) for an aggregate value of S$710m. As CMT current already owns 27.2% of CRS, the outlay for CRS will be S$516.9m. Presently, CMT’s gearing is about 37%; hence we see no issue with CMT financing this acquisition entirely with debt. We estimate that post acquisition CMT’s gearing will be at about 45% and this is still well within the 60% limit. However in terms of earnings accretion, CRS is unlikely to be a big booster as the assets are bought with a net property income yield of only 4.9%. Assuming full debt funding and cost of debt of 3.5%, we estimate full year DPU accretion at only 0.6 cents. Since the CRS acquisition is likely to complete in June, contribution in FY07 is only expected at about 0.3 cents.
Raising earnings estimates. Based on the above, we have raised our FY07 DPU forecast from 11.92 cents to 12.62 cents and FY08F DPU from 12.10 cents to 12.95 cents. CMT’s growth strategy remains focused on acquisitions, asset enhancement works (AEW) and development. We expect CMT’s maiden venture into development project to be in late 2007, and will probably be in Orchard Turn after the sale of the residential component.
Maintain HOLD. With the CRS acquisition, CMT’s asset size will be boosted from S$4.6bn to S$5.3bn. Furthermore, with the likelihood of CMT acquiring a development project soon, it is on target to achieve an asset size of S$7.0bn. In light of this, we have raised fair value from S$2.85 to S$3.44. CMT is not cheap, trading at a very high price-to-book of over 2.0x and with yield at below 3.5%. We thus maintain our HOLD rating.
CMT – DBS
The Primer on S-Reits
90% distribution to manage AEI cashflows. CMT reported 1Q07 results in line with expectations. Gross revenue grew by 27% y-o-y and 1% sequentially, with higher contributions from the acquisition of a 40% interest in Raffles City. Net property income grew by 30%, in line with the expansion of its asset portfolio. Mitigated by higher interest costs and asset management fees, distributable income grew by 25% y-o-y. However with 90% payout of distribution income to stabilise operating cashflows for ongoing asset enhancement initiatives, DPU arrived at three cents per share (ex on 26 Apr) which translates to annualised yield of 3.3%.
Buys out CRS, on track for S$7bn. CMT has announced that they are acquiring the remaining 73% stake in CapitaRetail Singapore Fund (CRS), a securitisation structure which incubates Lot One Shoppers Mall, Bukit Panjang Plaza and Rivervale Mall, based on total asset price of S$710m, at an average property yield of 4.9%. Planned AEI is already in place for Lot One with decantation expected to add another 10,600 sf, and we expect plans to be unveiled for the other two malls. Moving forward, we expect retail asset Clarke Quay and the iconic Orchard Turn development to form the pipeline to reach portfolio target of S$7bn by FY09, together with 20% strategic stake in CRCT as an alternate growth vehicle into the China retail sector.
But value creation through AEIs still the way to go. For investment property assets, retail malls in our view have the most scope for asset enhancement initiatives. CMT continues to illustrate this view, with an array of AEIs in progress. Reconfiguration of IMM and a new two storey annex is on-going, as well as Tampines Mall, Plaza Singapura and Junction 8. Sembawang Shopping Centre has begun redevelopment works expected to complete by 1Q08. With these AEIs scheduled for completion by 1Q08, they are expected to increase NPI by another S$15m, translating to 9.8% initial yield on capital expenditure, delivering more accretion than acquisitions at marked to market prices and imply value creation by another S$146m, assuming market cap rate at 5%.
Cambridge – DMG
Defensive with growth
Cambridge Industrial Trust (CIT) stands out as most defensive amongst industrial S-reits. FY07 yield of 7.3% is a significant 90-290bps above its comparable peers and backed by a stable income stream. The low P/book NAV of 1.22x indicates little acquisition upside have been factored into share price despite a visible asset pipeline. Rewarding partnerships with logistics services supplier CWT and Mitsui as well as wide business networks, have and would continue to supply a ready stream of new purchases. Acquisition-led growth coupled with organic expansion should translate to a DPU Cagr of 7-8% over the next 2 years. Amongst industrial S-reits, CIT has the greatest scope to enhance its properties which could boost asset backing and overall yields in the medium term. Our DCF-backed price target of $1.01 translates to a potential absolute return of 30%. Recommend buy.
Industrial and logistics-focussed reit. Cambridge Industrial Trust (CIT), an industrial and logistics-focussed reit has one of the most defensive income profile. Long rental contracts ensure sustainable earnings while higher-than-industry-average security deposits would iron out any rental fluctuations from tenant movements.
Growth via acquisitions. Its objective to expand asset base by $500m pa is within reach. In addition to the $119m worth of new buys, it has the first right of refusal and last look at CWT’s assets within the first 3 years of listing. Of the 2.3-2.6msf pipeline, 1.2msf are scheduled to complete this year. Beyond this, CIT can tap from C & P Holdings’ assets.
Inbuilt organic engine. It is well placed to leverage on the rising industrial market with inbuilt rental escalation clauses of 5-7% every 2-3 years. An estimated 78% of portfolio space is up for renewal in FY08, translating to a 4% organic increment to DPU.
The RNAV angle. A portion of CIT’s assets can be redeveloped to maximize floor area. We reckon rebuilding only those properties with <1x plot ratio to their maximum potential, could raise total GFA by 34% and add 10cts or 15% to asset backing, based on current levels. More importantly, these additions do not incur corresponding land costs and returns from these improvements should further enhance overall portfolio yields. These have not been factored into our present estimates.
Attractive risk-reward ratio. CIT offers value in view of its high yield, low beta and defensive attributes. At low P/book NAV of 1.22x, little acquisition expectation appears to have been built into share price and any newsflow should likely surprise on the upside. At our DCF-based price target of $1.01, assuming increasing asset base by $500m over the next 12 months, yield would still be attractive at 5.9%. Recommend buy.
CRCT – Daiwa
A rocky start
· We maintain our 4 (Underperform) rating for CapitaRetail China Trust (CRCT) and six-month target price of S$2.65, based on our RNG valuation method, after the announcement (on 19 April) of its maiden results for 1Q07.
· At first glance, the 1Q07 performance looked very poor (in our opinion). For the underlying seven-mall portfolio, gross revenue was 12.7% lower than our prorated 2007 forecast, while netproperty income (NPI) was 16.8% below our forecast. Fortunately, the negative variances appear to us to be confined mostly to 1Q07, or at worst to 2007.
· Even though some of CRCT’s ‘long-term’ investors are more focused on the distribution-per-unit (DPU) boost from acquisitions and major asset enhancements, the latest results are not likely to increase their investment confidence, in our opinion.
· We have revised down our NPI forecasts by 6.3% for 2007, 2.9% for 2008 and 2.2% for 2009. At the DPU level, we have revised down our forecast by 0.5% for 2007 and revised them up by 2.2% for FY08 and 2.5% for FY09 on net-interest savings (from lower financing costs and higher interest-income assumptions).