Month: July 2008
CMT – UOBKH
2QFY08: Maintaining Double-digit Growth
CapitaMall Trust (CMT) reported gross revenue of S$125.6m in 2QFY08, an increase of 20.9% yoy. Key growth drivers were Tampines Mall, IMM Building and Raffles City, whose revenue contributions grew 12.2%, 16.5% and 18.4% yoy respectively. Overall occupancy was unchanged at 99.9% in Jun 08. Leases for 319,087sf of retail space representing 9.9% of total net lettable area (NLA) were renewed in 1HFY08 at 9.9% over preceding rental rates. CMT announced DPU of 3.52 cents for the quarter, representing an increase of 12.8% yoy and an annualised yield of 4.6%.
Asset enhancement for The Atrium. The Atrium will be amalgamated with Plaza Singapura to create an integrated development with 170m of prime retail frontage along Orchard Road and NLA of 850,000sf combined. Some 215,000sf of additional retail space will be created on levels 1, 2 and 3 of The Atrium by converting unproductive ancillary space and loweryielding office space into retail space. The asset enhancement initiative will cost S$150m and will be carried out in three phases in FY09 and FY10. The enhancement initiative is expected to be completed in Aug 08. It is funded by the issue of S$650m five-year convertible bonds (exercise price: S$4.36) and medium-term notes of S$395m.
Maintain HOLD. CMT provides FY08 distribution yield of 4.9%, a narrow spread of 1.5% over 10-year Singapore government bond yield at 3.4%. Maintain earnings estimates and fair price at S$3.42.
CMT – UOBKH
2Q08: Maintaining double-digit growth
CapitaMall Trust (CMT) reported gross revenue of S$125.6m in 2Q08, an increase of 20.9% yoy. Key growth drivers were Tampines Mall, IMM Building and Raffles City, where revenue contributions grew 12.2%, 16.5% and 18.4% yoy respectively. Overall occupancy was unchanged at 99.9% in Jun 08. 319,087sf of retail space representing 9.9% of total Net Lettable Area (NLA) was renewed in 1H08 at 9.9% over preceding rental rates. CMT announced DPU of 3.52 cents for the quarter, an increase of 12.8% yoy, and represents annualised yield of 4.6%.
Asset enhancement for The Atrium. The Atrium will be amalgamated with Plaza Singapura to create an integrated development with 170m of prime retail frontage along Orchard Road and NLA of 850,000sf combined. 215,000sf of additional retail space will be created on Levels 1, 2 and 3 of The Atrium by converting unproductive ancillary space and lower yielding office space into retail space. The asset enhancement initiative will cost S$150m and will be carried out in three phases in 2009 and 2010.
The acquisition is funded by issue of S$650m 5-year convertible bonds (exercise price: S$4.36) and medium term notes of S$395m. The acquisition is expected to complete in Aug 08.
Revamp malls in Sembawang and Jurong. Sembawang Shopping Centre is being redeveloped by decanting 42,610sf of residential area and shifting more retail space into the high-yielding basement, level 1 and level 2. The new mall with NLA of 128,413sf will be completed in 4Q08. CMT has submitted written permission to increase the plot ratio for Jurong Entertainment Centre from 1.85 to 3.00, almost doubling NLA to 209,700sf. The asset enhancement initiative involves the construction of an Olympic-sized ice skating ring. CMT has applied for the ice skating ring to be considered as being for civic and community uses, which will provide additional floor space of 35,000sf if approved. The asset enhancement initiative is scheduled for completion in 4QFY09. Sembawang Shopping Centre and Jurong Entertainment Centre will provide incremental net property income of S$9.5m and S$12.4m p.a. when the asset enhancement initiatives are completed.
Maintain HOLD. CMT provides FY08 distribution yield of 4.9%, a narrow spread of 1.5% over 10-year Singapore government bond yield at 3.4%. Maintain earnings estimates and fair price at S$3.42.
CMT – CIMB
Smooth sailing
• 1H08 in line; full contributions from CapitaRetail Singapore properties. CMT’s 2Q08 results were in line with Street and our expectations. Reported distributable profit of S$58.6m, representing DPU of 3.52cts, formed 25% of our full-year DPU forecast of 13.9cts. Gross revenue of S$125.6m was up 21% yoy, aided by full contributions from Bukit Panjang Plaza, Lot One Shoppers’ Mall and Rivervale Mall. 1H08 DPU of 7.01cts was also in line with expectations, forming 51% of our estimate.
• Rental renewals and occupancy remained high. 1H08 rental rates increased 9.9% over preceding rates. Assuming an average 3-year lease, the average annual increase was 3.3%. Portfolio occupancy was 99.9% as at 30 Jun.
• Update on asset enhancements. CMT has paid the differential premium and stamp duties of S$65.2m to the URA following approval for the maximisation of unutilised gross floor area of about 386,000 sf at Funan DigitaLife Mall. CMT plans to erect four storeys of office space on top of the existing retail space at Funan. Including the fee for lease top-up to 99 years, CMT estimates the land cost for office development at S$247 psf, significantly below the S$1,010 psf average seen in recent government land sales. CMT is likely to proceed with its maximisation work after securing its anchor tenant(s). We estimate that work could commence in late
2008 or early 2009.
• Maintain Neutral and target price of S$3.64. We remain positive on CMT’s ability to mitigate inflationary effects with the incorporation of step-up rentals and gross turnover (GTO) rents for more than 85% of its retail tenancies. CMT is also expected to sustain the organic growth of its portfolio with continued enhancement work. Nonetheless, we expect the drag on yields from Atrium@Orchard to continue till the full potential of its integration with Plaza Singapura is realised in 2010. Potential contributions from Funan’s office space have not been factored in pending details. We remain Neutral on CMT with an unchanged target price of S$3.64, based on DDM valuation (discount rate 9.7%).
CMT – DBS
Still going strong
Story: CMT reported a 21% yoy (+4% sequentially) rise in Q2 revenue to $125.6m while net property income of $83.6m was 25% higher than a year ago. Distribution income grew 20% yoy to $58.6m (DPU: 3.52cts) and includes a $1m capital distribution from its stake in CRCT. CMT revalued its portfolio up by $281m (8%) to $6.2b (excl The Atrium), translating to a book NAV of $2.39.
Point: The better results were due to contributions from CapitaRetail Spore and 40% of Raffles City (bought in 2Q07 and 3Q07 respectively) and improved organic performance owing to higher rental rates and AEI initiatives at IMM, Plaza Singapura and Bugis Junction. On the average, leases were renewed at 9.9% higher than preceeding levels. This was partially moderated by a higher interest expense of $22.2m (+36.8% yoy) due to a larger asset base as well as higher cost of funds of 3.5% vs 3.4% a year ago. Looking ahead, organic growth will be
supported by the reversion of 69% of its portfolio income over FY09-10. Rollout of its planned $288m capex, largely from SSC and JEC, should boost bottomline. For The Atrium purchase, which is pending completion, it plans to spend $31m to decant office space and add more retail
area, bringing the overall retail component to 172ksf (48% of NLA) from the present 16k (4%). This will likely raise the yield of the building when completed by 2010.
Relevance: We have lowered our FY08 and FY09 DPU to 14.4cts and 15.3cts to adjust for higher funding costs. Correspondingly, DCF-backed price target is lowered to $3.55 to reflect a higher risk free rate and lower terminal growth rate to 1%. CMT is currently trading at FY08 and FY09 yields of 4.7% and 5% and offers potential upside of 16% to its price target. We continue to like CMT for its multi-pronged growth strategies with drivers from both organic and acquisition fronts, that would help maintain its pole position in the retail S-reit space. Maintain Buy.
AllCo – Phillip
A Fresh Start
Allco Commercial REIT (Allco) announced that Fraser Centrepoint Limited (FCL) has bought over Allco Finance Group’s (AFG) stake of 17.7% in the REIT and also 100% of the REIT manager Allco (Singapore) Limited for a total consideration of S$180 million. The sale is expected to complete by 6 August 2008. Allco will be renamed Frasers Commercial Trust upon completion.
Under the agreement, FCL will acquire the units at a price of $0.83. This represents a discount of 42.3% from the NAV of $1.44.
This latest acquisition of Allco manifests the M&A story surrounding the REIT sector. We have at least seen some form of management changes among the smaller independent REITs. The rationale behind FCL’s move lies in its intention to establish a commercial REIT of its own. By acquiring Allco, FCL saved itself the trouble of going through the time consuming route of an IPO.
After the acquisition by FCL, Allco will have a sponsor who has a ready supply of properties to inject into the REIT. Currently FCL owns and manages two Grade A office towers – Alexandra Point and Valley Point, and a high-tech industrial park – Alexandra Technopark. These properties value at S$710 million will form the expansion pipeline for the REIT.
Following the sale, Allco’s income support agreement with Allco Finance Group Limited (AFGL) for Central Park will be terminated. As per the announcement on 6 May 2008, there is a potential claim of A$6.4 million for the period from 1 Jan 2008 to 29 Mar 2009.
In addition, Allco recorded valuation loses from its Cosmo Plaza and Centrelink Headquarters properties after valuations were done on 30 Jun 2008. Currently Allco has a property portfolio size of S$1.9 billion.
Strategic review. Following the acquisition by FCL, there is no formal announcement on the intended divestment of the Australian assets. This is dependent on the strategic direction of FCL. However looking at the Centrelink Headquarters revaluation, the divestment may net proceeds 10% lower than originally intended.
A quick recap on Allco debt profile. Allco has S$70 million of debt maturing in Nov 2008, which will be repaid with the redemption proceeds from AWPF. Another S$550 million is expiring in Dec 2009 and another S$268 million of Yen denominated debt in 2012. With the Fraser and Neave Group as the sponsor now, we believe this would strengthen Allco financial credibility.
Allco’s current gearing is 47.3%. Following the full redemption of AWPF and assuming all 3 proposed properties injected into the REIT are fully funded by debt, gearing would increase to 57.9%.
Analysis. We view some synergistic benefits to the acquisition by FCL, however there are also some issues that linger in our minds. First up, Allco gain a reputable sponsor that could act as a catalyst to close up the gap between the trading price and NAV. Under the agreement, FCL will pay S$104 million to acquire 17.7% stake from AFG and $76 million to acquire 100% of the manager. The manager currently holds 1.48% (10,491,300) of the outstanding units. There is a termination fee of $20 million if the manger is removed from its capacity. Therefore we reckon the implicit price paid by FCL to gain a controlling stake is actually $1.17 per unit, assuming FCL’s purchase price of the manager includes this termination fee. This would then represent an 18.7% discount from the NAV.
One of the uncertainties associated with non-developer sponsored REITs and independent REITs is the lack of acquisition opportunities. With FCL as the sponsor, there is more visibility to the expansion pipeline now. Secondly, we feel Allco will be in a better financial standing when it comes to funding negotiations. It will also have more funding options being part of the Fraser and Neave Group.
With this initial announcement of acquisition, there are a few doubts that we would like to seek clarity. The foremost question would be the future direction of the REIT. Allco started out as a commercial REIT focusing on the office sector. With the purchase of Keypoint building, it added retail spaces to its portfolio. And recently, it gained provisional permission from URA to develop a hotel tower at the China Square property. So we are seeing a shift in investment policy of the REIT. Secondly, it would be the probability of the divestment of the Australian properties.
Valuation and reccomendation. For our valuation, we took the conservative stance of impairing the potential A$6.4 miilion income support from AFGL. We also apply stringent parameters in our valuation model to reflect the bad market condition. Our revised valuation gives us a FY08F DPU of 6.41 cents. We lowered our fair value from $1.05 to $0.86. We believe Allco is a long term value play and keep our buy recommendation at the current price.
Risks to our valuation. The macro risk affecting Allco is the sustained economic slowdown leading to a drop in rental revenue. Poor credit environment couple with rising interest rates will increase the borrowing cost and interest expense. Current gearing of Allco is 47.3%. Concern exists over the leverage if Allco is to acquire using debt. Therefore in our view, Allco will need to raise equity at some point in time or divest the Australian properties to lower gearing.