Month: March 2008
Rickmers – OCBC
A Tale of Two Bets
Competitive distribution yield despite cash retention. Rickmers Maritime (RMT) is a listed shipping trust. Its shipping and distribution incomes are tax-exempt for all investors. RMT currently distributes 8.56 US cents annually. With its current price at S$1.06, or US$0.76, this translates to an attractive yield of 11.2%. In comparison, the Singapore 10-yr government bond yields 2.24%. RMT’s yield is also on par with the other shipping trusts listed on SGX, despite RMT retaining more than 25% of its cash income (net income + non-cash charges like depreciation) for capex. Note that non-USD investors would see their distributable income
subject to forex fluctuations.
Relatively lower asset yields. The shipping trusts’ vessels can be judged on their earning prowess – or their asset yield (annual lease income to acquisition cost of asset). We estimate that RMT’s vessels feature relatively lower asset yields, net of time charter expenses, versus the other listed peers.
Big plans for growth. RMT is growing at the fastest pace and magnitude of all the shipping trusts. RMT has already grown its portfolio from five vessels at its May 2007 IPO to ten by January this year. It is contracted to purchase another 13 ships over 2008-2010 for a total consideration of about US$1.35b. This will boost its fleet capacity by 3.2x, from 40,910 TEU currently to 131,560 TEU.
Leverage will spike. When RMT listed, it was entirely equity-funded. At 31 Dec 2007, its debt-to-equity ratio was 0.58x. To support its US$1.35b worth of acquisition plans, RMT would have to raise new equity eventually. However, the trust’s debt-to-equity could increase to 3x before the next tranche is raised. This is a double-bet, as RMT is focusing solely on the market for containerships, which is driven by the trade of manufactured goods.
Target price S$1.22. Our DCF value of the unitholders’ share in the trust is US$0.90 per unit. Based on OCBC Treasury’s view of a 1.35 SGD/USD exchange rate by end 2008, we set our target price at S$1.22, a 15% upside from the current price. Our valuation assumes the acquisition of another seven vessels for about US$500m over 2008-2012. With limited
clarity on RMT’s future distribution policy, we assume it continues to retain about 25-30% of its cash income. This still translates to high yields of 12.2% in FY08 (9.33 US cents DPU) and 14.4% in FY09 (11.01 US cents DPU). We are initiating coverage on RMT with a BUY rating.
AllCo – DBS
Unlocking its asset values
Story: Allco REIT has announced that I) Allco Principals Investment Pty Limited (API) has been served a receivership notice. While API does not have a direct stake in Allco REIT, it holds 51% in the REIT manager and has an income support arrangement totaling A$8m till Mar’09.
Separately, Allco REIT also announced a strategic review in of its portfolio, which may result in a divestment in its Australian properties.
Point: In our view, both this events could have a slight dilutive impact on earnings in the near term. The loss of income support agreement is possible given that it is unsecured. Therefore, we have cut our DPU forecasts by 5% in FY08 and FY09 to 6.7cts and 7.0 cts respectively.
In addition, while we view that it could be a good time to divest its Australian property given the toppish office cycle, interest savings from paring down debt is unlikely to offset the vacuum in earnings in the near term. Our sensitivity analysis of a sale of Central Park indicates a base case scenario where we have assumed management to use sales proceeds to repay its existing debt facilities further erodes DPU by another 10%. Management has also indicated that it could look to diversify into Malaysia to boost forward income streams. However, no timeline is indicated.
Relevance: Allco’s share price had fallen by c.10% since the beginning of the year and is currently trading at attractive 8.3% FY08 and 8.7% FY09 yield. Our DCF – backed revised TP of S$1.54 offers 49% upside. Key uncertainty for this stock is the lack of clarity of potential reinvestment plans moving forward, which will lead to a drag in share price in the near term.
AllCo – BT
Allco Reit could divest its Aussie assets
ALLCO Commercial Real Estate Investment Trust (Allco Reit) could divest its interest in its Australian properties which are currently valued at A$482.9 million (S$619.3 million).
This includes its 50 per cent interests in Central Park in Perth and Centrelink Headquarters in Canberra. Allco Reit is also invested in Allco Wholesale Property Fund which in turn has interests in several properties in Sydney.
In a statement released on Sunday, the Reit manager, Allco Singapore, said: ‘In the ordinary course of managing the business of Allco Reit, the manager continually evaluates its purchase, hold and divestment options in respect of its assets with a view to maximising unitholder value.’
The statement was released after Australian media got wind of the potential divestment and reported it on Friday.
When contacted, Allco Singapore chief executive and managing director Nicholas McGrath reiterated statements made in its press release that Allco Reit has not entered into any ‘binding arrangements with respect to the sale of any of these properties’.
If the divestment takes place, Mr McGrath said, the capital would be redeployed to higher-growth areas in Singapore and other Asian cities.
He also said that some of this capital could go towards reducing its leverage and repay debts.
Apart from Singapore, Allco Reit has assets in Osaka and Tokyo.
Its three key properties – China Square Central and 55 Market Street in Singapore, and Central Park in Perth – had a combined value at the end of December of $1.13 billion, based on the latest revaluation.
Allco Singapore said the Reit is trading at a substantial discount to its reported net asset value and the strategic review to study the divestment of its Australian assets is ‘designed to explore the means by which this gap may potentially be closed’.
As at Dec 31, 2007, Allco Reit’s net asset value was $1.45 (post payment of 2H2007 distribution). The Reit was last traded at 80 cents per unit.
Asked if there was a possibility that Allco Reit could itself be acquired, Mr McGrath said he was not in a position to answer.
‘If an offer was made to the unit-holders that was attractive, it would be up to the unit-holders to decide,’ he said.
Allco – SGX
Background
As previously announced on 1 February 2008, Allco REIT’s strategic focus in 2008 is as follows:
1) Execution on asset plans to drive asset values and organic growth; and
2) Strategic portfolio management with a view to redeploying capital to higher growth assets.
The Manager is in the process of undertaking a review of the entire asset portfolio of Allco REIT with the objective of enhancing value for Unitholders. The Manager’s view is that the current Allco REIT unit price is not reflective of the underlying value of Allco REIT’s portfolio. Accordingly, the review is being undertaken in the context of the strong underlying property fundamentals within the Allco REIT portfolio. Allco REIT is trading at a substantial discount to its reported net asset value and the strategic review is designed to explore the means by which this gap may potentially be closed. Allco REIT’s net asset value has increased from S$0.93 per Unit as at the listing date of 30 March 2006 to S$1.451 per Unit as at 31 December 2007.
Australian assets
In the ordinary course of managing the business of Allco REIT, the Manager continually evaluates its purchase, hold and divestment options in respect of its assets with a view to maximising unitholder value. To this end and as reported in the Australian media on 7 March 2008, the Manager is currently investigating the potential divestment of Allco REIT’s interests in its Australian properties. Allco REIT has not entered into any binding arrangements with respect to the sale of any of these properties.
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SREIT – Kim Eng
REITs Sector
♦ Defensive and high-yielding SREITs in the limelight amid stock market volatility
- REITs offer varying yields and geographical exposure. Attractive yields from industrial REITs, offering spreads over Government bonds of about 4%.
♦ M&A theme in focus
- Strategic review of MMP REIT signals possibility of privatization or M&A, in view of the relatively attractive P/B ratio.
♦ Watch out for retail REITs which have potential strong organic and inorganic growth
- Fraser Centrepoint Trust with several acquisitions from the Sponsor’s pipeline. Likewise for CapitaCommercial Trust and CapitaMall Trust for the strong management and direct benefit from CapitaLand’s capital recycling model.
♦ Inflation-hedged REIT
- Parkway Life REITs has an in-built rental mechanism that is hedged against increases in the consumer price index (CPI)
♦ Hospitality-centric REITs to benefit from higher room rates
- CDL Hospitality Trust (CDLHT) and Ascott REITs are well-positioned to enjoy higher RevPAR, given the rising hotel room rates. CDLHT could be best proxy to Singapore’s hospitality sector.
Tables here