Month: April 2008
HWT – DBS
Ready To Surf Up
Story: Hyflux Water Trust (“HWT”) is the first pure-play water trust to be listed in the region and should benefit from strong market fundamentals in the water infrastructure sector in China.
Point: The initial portfolio consists of water-related assets – water treatment plants, wastewater treatment plants and water recycling plants – capable of supplying a total capacity of 445,000 cu m / day in key industrial belts of high growth provinces in China. Growth potential in the initial years will stem from completing plants and escalating utilization rates of existing plants, which could lead to an 82% increase in annual tariff receipts over 2008-2010. Additionally, Hyflux has granted HWT the rights of first offer and refusal (“ROFOAR”) to a pipeline of assets with total design capacity of 760,000 cu m/ day, all ready to be injected into the trust in tranches every 12-18 months. HWT’s debt free position at IPO also leaves significant headroom for debt-sponsored acquisitions in the future.
Relevance: HWT is a defensive earnings play with predictable cash flows, promising a DPU yield of of 7-9% for FY08 and FY09. At current valuation of 0.88x P/BV, HWT compares favourably with REITS and other infrastructure/ shipping trusts listed in Singapore, but with a much higher debt headroom to fund stronger growth potential. We believe the counter will outperform over time as HWT begins to deliver on it post-IPO acquisition schedule, just as market has favoured developer-backed REITs which have delivered on their acquisition promises. We initiate coverage on HWT with a BUY call at a DDMbacked Target Price of S$0.78 (WACC 10.0%).
CCT – CIMB
CCT to issue S$280m of convertible bonds
CCT issues bonds to fund acquisition and asset enhancement. CCT announced that it would issue no less than S$280m of bonds of 5-year maturity, convertible into new CCT units. CCT also has an over-allotment option to raise an additional S$90m, with the agreement of the underwriter Standard Chartered Bank, thereby raising the total proceeds to S$370m. Proceeds from the bond issue would go to refinancing their short term debt, working capital and partial financing of asset enhancement works and new acquisitions including One George Street.
Cost of bonds at 3.95%. The convertible bonds will bear interest at 2% per annum whilst its yield to maturity would be at 3.95% per annum. Holders of these bonds may convert the bonds into units between 21 May 2008 and 21 April 2013 at a conversion price of S$2.6762, or 23.9% above CCT’s closing share price of S$2.16 on 1 April 2008. If there is no redemption, conversion or cancellation, the convertible bonds would be redeemed at 110.66% of their principal amount, or S$311m on 6 May 2013.
Comments
Impact of convertible bonds (CB) issue in dilution scenario. The quantum of this CB issue is relatively small, amounting to only 24% of the S$1.165bn purchase price for One George Street. At the S$2.6762 conversion price, there would be an increase of 104.6m shares. Potential marginal dilution impact is marginal, on assumption of full conversion. If converted, 2009 DPU is lowered by 1.4% to 14.2cts (from 14.4cts) while 2010 DPU is lowered by 1.9% to 15.2cts (from 15.5cts). Conversion in the short term to be rather unlikely for now given that the conversion price is at a 25% premium to closing price of S$2.14 on 2 April 2008. In CCT’s trading history, stock traded above the conversion price only during Jan-Sep 07, hitting a high of S$3.26 when expectations of office rental escalation was more bullish. With new stock of office supply increasingly entering the market from 2010 onwards, we take the view that market expectations are unlikely to return to 1H07 levels. However, with the tight office situation currently, the conversion of this instrument cannot be totally ruled out. Our target price for CCT would decline by 1.7% to S$2.85 after incorporating full dilution from the CB.
Marginal improvement in DPU estimates in no dilution scenario. Without any impact from the potential dilution, we project a marginal 0.7% improvement in 2009 DPU estimates to 14.5cts and 0.6% increase in 2010 DPU estimates to 15.6cts. Our raised DPU estimates come as a result of the lower cost of funding (3.95%) versus our higher estimate of cost of debt (4.5%) assumptions previously. We have assumed that there would be no dilution in this convertible bond issue but have included the amortisation of interest on the convertible bonds.
Valuation and recommendation
Impact of bonds issue marginal, Maintain Outperform, target price raised to S$2.91. We reiterate our Outperform recommendation on CCT with a marginally higher target price at S$2.91, up from S$2.90 (discount rate at 6.6%) based on DDMderived valuation. This is based on the assumption that there would be no conversion to units prior to maturity of the convertible bonds in 2013. At its current price of S$2.14, CCT offers an attractive total return of 41% including a potential price upside of 36% to our target price of S$2.91 and a dividend yield of 4.8%.
CMT – BT
CMT issues 2-year notes
CAPITAMALL Trust, Singapore’s largest property trust, said yesterday it had issued $155 million worth of two- year fixed-rate notes bearing an annual interest rate of 3.25 per cent. The notes, issued under its $1 billion multicurrency medium-term note programme, will mature on April 1, 2010. The proceeds will be used mostly for general working capital, CapitaMall said in a statement.
CapitaMall competes with other Singapore-listed real estate investment trusts (Reits) which own offices and retail malls, including Suntec Reit, Macquarie MEAG Prime and Frasers Centrepoint. — Reuters
CMT – UOBKH
Proactive Enhancements
CapitaMall Trust (CMT) invests in quality income-producing real estate used for retail purposes. It owns 13 retail malls strategically located in suburban areas and downtown core. CMT is the largest retail REIT in Singapore with a market share of 13% for private retail stock. It also has a 20% stake in CapitaRetail China Trust (CRCT), a China-based retail REIT listed on Singapore Exchange. CMT was assigned a corporate rating of A2 with a stable outlook by Moody’s Investor Services.
Creating office blocks at Funan DigitaLife and Tampines Mall. CMT has received provisional permission to utilise unused gross floor area (GFA) of 385,500sf for Funan DigitaLife, which has only utilised 3.8 of its allowable plot ratio of 7.0. The unused GFA will be utilised to build a four-storey office block with an estimated net lettable area (NLA) of 277,630sf on top of the existing mall. NLA for retail will also increase 14% from 296,601sf to an estimated 338,360sf. In addition, CMT has been granted an increase in plot ratio for Tampines Mall from 3.5 to 4.2. The additional GFA of 95,000sf will be utilised to build an office block on top of the existing mall. We expect construction to be completed by 2H10 and have factored in contributions from the two office blocks starting 1Q11.
CMT provides 2008 distribution yield of 4.51%, a healthy spread of 2.35% over 10-year Singapore government bond yield of 2.16%. Our target price is S$3.83 based on the two-stage dividend discount model.
CCT – BNP
One George Street – Not a sweet deal
Option to acquire One George Street
CCT has obtained an option to acquire One George Street (OGS) building from CapitaLand at SGD1.17b. OGS is a Grade A office located in Raffles Place. The offer price works out to SGD2,600/sqft of NLA, which includes income support from CapitaLand for a period of five years. The minimum NPI guarantee of SGD49.5m pa represents a 4.25% yield and an implied rental rate of SGD10.50/sqft.
To be 100% debt funded
CCT intends to fund OGS with 100% debt. It has secured committed funding for the entire purchase price. However, no covenant agreement has been established for the interest rates, leaving it exposed to interest rate fluctuations between now and its EGM at end-June 2008. With this acquisition, CCT’s gearing will rise from 27% to 40%.
Not quite a sweet deal
CCT has been successful in its recent fund raising, securing competitive interest rates at 3.1% for two of its MTN tranches, which amounted to SGD250m. In view of the high cost of long-term debt (in excess of 4%), we believe CCT will likely embrace a short-to-medium term debt capital structure to justify any immediate accretion to this acquisition. Taking into account the one-off 1% acquisition fee and assuming a 3% borrowing cost, the acquisition of OGS will be mildly yield accretive.
Weak positive carry could deteriorate credit metrics
The outright drawback from this deal is the risk of a ratings downgrade by Moody’s from A3 to Baa1. While OGS may enhance CCT’s asset quality profile and income diversity, we believe this deal could potentially deteriorate its credit metrics as the relatively low yield from OGS compared with its interest cost is likely to drag down its overall portfolio interest cover from our FY08 estimate of 4.1x. Given the low inherent rents from OGS existing tenants (about SGD4-5/sqft) and only 50% NLA expiry over 2008-09, it may take well over three years for OGS’ intrinsic rents to exceed the SGD10.50/sqft mark, hence any recovery in its interest cover. Should this deal transpire, we project CCT’s interest cover to fall to about 3.74x, assuming a borrowing cost of 3%. We remain neutral on this deal but maintain our BUY and TP of SGD2.56.