Month: November 2007
Shipping Trusts – UOBKH
Singapore shipping trusts, namely First Ship Lease Trust (FSLT), Pacific Shipping Trust (PST) and Rickmers Maritime (RMT), have underperformed the STI, Sreits and other business trusts. Their share prices have fallen below their initial public offering (IPO) prices and FY08 and FY09 dividend yields have risen to 8.7% to 10.8%. We believe Singapore shipping trusts’ underperformance is due to the perception among investors that they are self-liquidating and a portion of their high dividend yields is a return of capital to investors as ships are depreciating assets with a lifespan of 30 years. Recent weakness in the US$ has also dampened share price performance.
We initiate coverage on the sector with an OVERWEIGHT rating. Our rationale is based on the following reasons:
Limited downside from current share price levels. Notwithstanding a weak US$, we see limited downside in Singapore shipping trusts. Assuming a 3.3ppt (i.e. annual ship depreciation) of their dividend yields is a return of capital, investors would still get a decent net return ranging from 5.4% to 7.5%. In the worst case of no future value accretion, which we believe is unlikely, this is an investor’s minimum return. Shipping trusts’ long-term, fixed nature of charter contracts of 5-12 years provide stable earnings, cash flows and dividends, cushioning against the short-term cycles of the shipping industry.
Growth element is not priced in. Accretive acquisitions will drive a re-rating of the shipping trusts. A case in point is the experience of US long-term charter, ship finance peers. Seaspan Corp, a similar ship finance company, suffered share price underperformance in the initial period post-IPO (Aug 05). However, as accretive ship acquisitions gained momentum, the stock was strongly re-rated with share price appreciating by more than 50% and its 2007 dividend yield compressed from above 9% at IPO to 6.0% presently. Danaos Corp, another comparable ship finance company, also had a similar experience since its IPO in Oct 06. Danaos is currently trading at 2007 dividend yield of 5.6%.
Ship acquisitions are gaining momentum. RMT, the most aggressive among the shipping trusts, has increased its fleet by more than three-fold since its IPO in May 07. PST has enlarged its fleet by 61% with its recent acquisition of two 4,250 TEU containerships and FSLT is confident about doubling its fleet in the next two years. Ships are being acquired at asset yields (net operating cash flow/investment cost, before financing) of 9.6% to 10.5% and project IRRs of 8.1% to 9.0%. Against a cost of debt of about 6% (if funded totally by debt) or a WACC of about 7% (if funded by a mixture of debt and equity), the acquisitions should be accretive.
Ample upside. We are forecasting a share price upside of 16% to 27% in 2008 and 6% to15% in 2009, with RMT to lead the sector’s re-rating. Dividend yield is our primary valuation methodology. We expect RMT’s yield to compress on re-rating from the current level of 8.7% to 7.5% by end-08 and 7.0% by end-09. As for FSLT and PST, we forecast their dividend yields to compress from their current +10% level to 8.5% by end-08 and 8.0% by end-09. Against our DCF valuations, PST, FSLT and RMT are currently trading at 35%, 19% and 16% discounts respectively. They are also trading at a P/RNAV of 0.73x to 0.86x, based on our RNAV estimates.
Risks: Shipping trusts face the same risks as any ship owner, but to a much lesser degree as earnings are substantially protected by their long-term charter contracts. A weak US$ does not have an impact on the earnings and distributions of shipping trusts. However, the depreciation of the US$ would have a negative impact on non-US$ investors (unless their investment currency is linked to the US$).
Strategy: OVERWEIGHT. We have a BUY rating on all three Singapore shipping trusts, FSLT, PST and RMT. Among them, RMT appears to be the most aggressive in terms of ship acquisitions while FSLT reduces operational risk with a diversified fleet. PST trades at the largest discount to our DCF valuation and could achieve greater distributable cash and dividend payout if it were to restructure its debt repayment.
FSLT (FSLT SP/Target: US$1.05). We expect FSLT to derive value accretion from funding ship acquisitions with low-cost debt. Among the Singapore shipping trusts, FSLT has the lowest debt-to-equity ratio of 0.1x. It is targeting US$200m worth of acquisitions p.a. Although it does not have an acquisition pipeline from its sponsor (unlike the other two shipping trusts), the shareholders of FSLT’s sponsor are shipping heavyweights in their own right with an extensive network of global contacts. We initiate coverage on FSLT with a target price of US$1.05 in anticipation of dividend yield compression to 8.5% by end-08. We forecast a further rerating in 2009 to a compressed yield of 8.0%, translating into a target price of US$1.11 by end-09.
PST (PST SP/Target: US$0.50). PST has also set itself an acquisition target of S$200m p.a. It recently acquired two 4,250 TEU containerships from its sponsor, Pacific International Lines (PIL). These two ships are part of the 38 which PST has the Right of First Refusal to acquire from PIL. These two new ships will increase PST’s fleet from eight to 10 ships and raise its fleet capacity by 61% from 13,864 TEUs to 22,364 TEUs. PST has a conservative debt repayment of 10-12 years from IPO. We do not discount the possibility of debt restructuring though PST’s management presently has no plans to do so. This would put PST on an equal footing with FSLT and RMT. The additional distributable cash arising from a debt restructuring could be used for ship acquisitions or higher dividend payout. We value PST at a dividend yield of 8.5% by end-08 and 8.0% by end-09. This translates into target prices of US$0.50 and US$0.53 respectively.
RMT (RMT SP/Target: US$1.19 (S$1.72)). Thus far, RMT has been the most aggressive in terms of ship acquisitions. Since its IPO, the trust has grown its fleet capacity more than three-fold from 10 ships with a total capacity of 40,910 TEUs to 23 ships of 131,560 TEUs. A strong pipeline from its sponsor supports RMT’s acquisitions. It has the most competitive trustee management fee structure among the three shipping trusts, which augurs well for the long-term interests of unitholders. We initiate coverage on RMT with a target price of US$1.19 (S$1.72), as its dividend yield forecast to compress to 7.5% in FY08 and a target price of US$1.37 (S$1.98) in FY09 with further yield compression to 7.0%.
AllCo – SGX
(1) APPROVAL IN-PRINCIPLE FOR THE LISTING OF NEW UNITS;
(2) A NON-RENOUNCEABLE PREFERENTIAL OFFERING OF UP TO 175,182,925 NEW UNITS; AND
(3) BOOKS CLOSURE DATE.
Some Extracts
The issue price of each New Unit pursuant to the Preferential Offering (“Issue Price”) will not be at more than a 10.0% discount to the weighted average price for trades done on the SGX-ST for the full market day on which the underwriting agreement is signed. If trading is not available for the full market day, the weighted average price will be based on the trades done on the preceding market day up to the time the underwriting agreement is signed
The Preferential Offering will comprise a non-renounceable preferential offering of up to 175,182,925 New Units on the basis of one New Unit for every four existing units (“Existing Units”) in Allco REIT held by Eligible Unitholders (as defined below) as at the Books Closure Date (as defined below), fractions of a Unit to be disregarded (“Preferential Offering”).
The last day and time of trading of the Existing Units on a “cum” basis will be 28 November 2007, 5:00 p.m.
The Manager expects that the New Units will be issued and traded on or about 28 December 2007.
Source : SGX
CRCT – BT
CRCT seeks approval to retain Beijing mall, raise up to $280m
CAPITARETAIL China Trust (CRCT) wants approval from unitholders to keep its main income generator Wangjing Mall for another six months and to raise equity of up to $280 million to help acquire Xizhimen Mall. Both malls are in Beijing.
CRCT does not have legal title to Wangjing Mall – only contractual rights to the property. Legal title is still pending formal approval from the Chinese authorities. If this is not obtained within 12 months of CRCT’s Dec 8, 2006 listing date, the trust needs the nod from unitholders to retain the mall in its portfolio for another six months.
Wangjing Mall, which is almost fully let, is projected to contribute 33.2 per cent of the distribution per unit (DPU) from CRCT’s enlarged portfolio, including Xizhimen Mall, for the year ending Dec 31, 2008.
The forthcoming $336 million acquisition of Xizhimen Mall will boost CRCT’s portfolio to eight malls worth almost $1.2 billion and take the trust closer to its target asset size of $3 billion by 2009. The acquisition will boost projected FY2008 DPU 10.3 per cent to 7.2 cents, assuming the new issue is priced at $2.50 a unit.
The equity fund-raising exercise will involve the issue of 112 million new units for offer and placement to existing unitholders and new institutional and retail investors.
Assuming CapitaLand and CapitaMall Trust, which each own 20 per cent in CRCT, subscribe for the new units to maintain their existing stakes in CRCT, $168 million will need to be raised from other parties, making the equity fund-raising exercise ‘highly palatable’, Hsuan Owyang, chairman of CapitaRetail China Trust Management, said in a statement yesterday.
Besides the equity fund-raising exercise, CRCT will seek additional borrowings of about $88 million. The balance of the proceeds beyond the $344 million total acquisition cost of Xizhimen Mall, including related fees and expenses, will be used for working capital and capital expenditure. CRCT’s aggregate leverage will drop from 31 per cent to 28.7 per cent, giving it flexibility to undertake future acquisitions and asset enhancements.
An extraordinary general meeting to obtain untiholders’ approval will be held on Dec 4, 2007 and the proposed equity fund-raising exercise will be carried out no later than January 2008.
CRCT is buying the seven-storey Xizhimen Mall, which officially opened in September this year, from CapitaRetail China Incubator Fund.
The proposed acquisition includes an agreement to buy a planned extension to the mall’s basement 1 from Beijing Finance Street Construction Development Co, the original developer of the Xihuan Plaza complex where the mall is located.
Office REITs – UOBKH
Office REITs
Cooling off in bidding for office site
Auction for Marina View Land Parcel B located diagonally behind One Shenton has closed with only two bids, reflecting cautiousness for commercial properties due to the sub-prime mortgage crisis in the US. Marina View Land Parcel B has site area of 0.9hectare and can be developed into maximum gross floor area of 1.2m sf with at least 60% utilised for office and at least 25% utilised for hotel.
The top bid from MacQuarie Global Property Advisors came in at S$952.9m or S$779.42psf ppr. This is lower than CB Richard Ellis’ expectation of S$1,200 to S$1,300. Knight Frank has expected bids of between S$1.1b to S$1.3b or S$900 to S$1,060psf ppr. The second bid from CapitaLand came in at S$898m or S$734.52psf ppr. Some industry players are concerned that the latest site may not be awarded because the reserve price may not have been met.
Monthly gross rents of Grade A office space in Raffles Place increased by 18.2% qoq to average at $15.00psf in 3Q07. Capital values of Grade A office space in Raffles Place has also risen 23.8% qoq to an average of $2,416psf (source: Colliers International). K-REIT Asia and Suntec REIT have also recently acquired one-third stakes in One Raffles Quay at S$941.5m or S$2,115psf.
The limited supply of office space coming on stream over the next three years will provide some cushion for office properties. However, the cooling off in bidding for office sites within the Central Business District will have a dampening effect on share price for office REITs such as K-REIT, Suntec REIT and CapitalCommercial.
First Reit – SGX
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