Month: July 2008
Cambridge – DBS
Attractive, Stable Yields
Story: We initiate Cambridge Industrial Trust (CIT) with a BUY rating and target price $0.88 backed by DCF valuation. CIT has been on an acquisition path in FY07, almost doubling its portfolio since listing to 43 local industrial assets worth c.$967m as at Jun’08. We like CIT for its attractive yields of 9% backed by secured rental income with an added avenue for acquisition growth through leveraging on its strategic partners network.
Point: CIT’s attraction for investors will be its i) earnings stability from an asset portfolio leased on a long term basis (average rental expiry of 6.4 years) with built-in escalation clauses providing organic growth. ii) S$ denominated earnings which is expected to remain strong against other currencies over the medium term.
In terms of growth opportunities, we believe that strategic alliances with Oxley Capital Group and Mitsui & Co Ltd can provide valuable experience and network into the Asia Pacific, forming a platform for potential portfolio growth through its established wide business. Potential deals from these networks could provide a basis for earnings upside surprise going forward. CIT has another S$62.8m worth of assets to be injected, when concluded could add a further $0.04 to our target price.
Relevance: We believe CIT is undervalued, trading at 0.9x P/BV against the industrial REITs trading in the range 1.2x – 0.7x P/BV and offers an attractive DPU yield in FY08 and FY09 of c.9.6-9.7%. Therefore, we initiate coverage with a BUY recommendation, TP $0.88.
AREIT – BT
A-Reit targets $5b portfolio size by 2010
Unitholders approve issuing new units, convertibles to add to financing options
ASCENDAS Real Estate Investment Trust (A-Reit) is looking to invest some $500 million in industrial properties and business space each year to reach its target portfolio size of $5 billion by the end of 2010.
A-Reit will expand its portfolio through development projects and yield-accretive acquisitions.
The annual investment target is achievable, said Tan Ser Ping, CEO of A-Reit manager Ascendas Funds Management (S) Ltd. A-Reit’s latest investment has been the $246.8 million purchase of 31 International Business Park, Creative Technology’s headquarters building in Jurong East.
A-Reit unitholders yesterday approved a general mandate to issue new units or convertible securities in the financial year ending March 31, 2009. ‘This mandate would provide A-Reit with the necessary financing flexibility to respond to market opportunities,’ said Mr Tan.
Nevertheless, ‘the manager does not expect any immediate need to utilise the mandate to either issue new equity or debt securities such as convertible bonds’, he said.
To diversify funding sources, A-Reit is also putting in place a medium-term note issuance programme, Mr Tan told BT. This should be ready by the end of the third quarter or early fourth quarter.
With a gearing level of around 38 per cent in March, A-Reit also has debt capacity for near-term investments, Mr Tan said. ‘Access to capital is more difficult now, but … the better Reits, including A-Reit, have still got strong support from banks. Our existing banking lines are intact.’
Mr Tan believes that rental growth for business and science park properties and hi-tech industrial properties will remain healthy in A-Reit’s current financial year – rents for business and science park properties, for instance, are likely to grow by around 15 per cent.
However, he points out that uncertainty in the global economic environment will continue to cast a shadow over local conditions.
A-Reit units fell four cents yesterday to close at $2.21. CLSA issued a ‘buy’ call on the counter last week.
MapleTree – CIMB
Taking the bitter medicine
MLT proposes renounceable rights issue
Seeking S$606.7m through rights issue. MLT held a briefing last evening to clarify its rights issuance announced last week. In a nutshell, MLT will be seeking unitholders’ approval at an EGM on 18 Jul for its proposal to issue 831.1m rights at S$0.73 apiece. This would raise funds of S$606.7m, assuming full take-up. The funds would be used for the acquisition of 12 properties and the extension of one property that were announced last year, partial debt repayment and corporate and working-capital uses. Sponsor Mapletree Investments Pte Ltd has undertaken to vote in favour of the rights issue and subscribe for its 30.16% entitlement. It also has an option to subscribe for excess units. Any remaining rights not taken up by the sponsor will be underwritten by DBS, Goldman Sachs, Macquarie Capital and UBS.
More opportunities to acquire at improved yields. Management guided that growth in the Asian logistics industry and demand for logistics space in the region remain strong. As a result of the credit crunch, sellers are now more relenting in their asking prices, resulting in moderately improved yields. Management also indicated that the company will continue to grow via acquisitions. However, it will be more conscious of keeping gearing levels to a lower 45-50%.
Comments
Gearing down to 38%. Assuming full take-up of the 831.1m rights, the S$606.7m raised will repay part of the debt taken to acquire the 12 properties and extend one property. Management guided that short-term debt from Singapore, Hong Kong and Malaysia is likely to be paid down. Gearing could fall from 55% to 38%, inclusive of the properties, giving MLT more financial flexibility to acquire when opportunities arise.
Immediate dilution. Assuming full take-up, the share base will enlarge from 1,108.2m units as at end-FY07 to 1,939.3m units. Our earlier DPU forecast of 6.9cts for FY08 will fall to 5.44cts after dilution, yielding 6.4%.
Valuation and recommendation
Downgrade to Neutral from Outperform; target price reduced to S$1.00 from S$1.36. We have cut our DPU estimates by 20-22% to account for dilution from the rights issue. Additionally, we are assuming an improved acquisition yield of 7% over the 6% used earlier. Our discount rate has also been raised from 6.7% to 8.0% from a high risk-free rate of 5.4% and an equity premium of 4.0%, in line with house guidelines. Accordingly, our DDM-derived target price has been lowered to S$1.00.
We see the proposed rights issue as a bitter pill that needs to be taken at some stage in order for MLT to come out of its high gearing, and move forward. MLT’s fundamentals of a quality portfolio, long leases (average lease term to expiry is 5.7 years), high occupancy rate of 99.6% and reputable tenants remain. Nonetheless, a slowdown in acquisitions this year and an expected increase in cost of debt may imply that ML is not likely to see much price catalyst in the near term.
Allco – DBS
A China Square Central Hotel ?
Allco REIT (Allco) announced that URA has granted a Provisional Permission in respect of the proposed Alterations and Additions (A&A) to their China Square Central (CSC) asset which will include an additional 16,000 sqm (170,000 sq ft) of GFA to the property.
Allco’s plans will include the following:
i) An additional 10-story hotel tower with approximately 350 rooms (on the additional GFA allocated)
ii) conversion of existing car parks into office space
iii) refurbishment of the existing retail space
iv) payment of a differential premium where applicable.
The development is limited to c.S$203m based on 10% of the value of Allco’s total deposited property as at 31 Dec’07.
Investors have expected an announcement on the redevelopment of CSC. However, it is too early in the process to quantify the potential impact from such a development, this plan, in our view, is inclined towards Neutral – Negative, assuming a potential increase in funding and the following considerations:
1) Strategic direction of the REIT ? Allco is essentially listed as a commercial REIT. Moving forward, the change in portfolio mix, could indicate a change in key strategic direction of the REIT.
2) Change in perceived risk profile for the REIT. The proposed hotel component (which is c.10% of total GFA), could introduce earnings volatility given the more cyclical hotel earnings business.
3) Potential dilution to earnings and distribution income in near term. Potential loss of rental income and rental rebates to current tenants during redevelopment could impact earnings. Potential interest payments capitalized during development would also affect distribution income. Assuming the project is fully debt funded, we estimate that higher interest costs could reduce DPU by c.20% from FY09 till the completion of the hotel.
4) Impact on Gearing. As at 31 Mar ’08, Allco’s gearing at 44.8%, assuming a S$203m development cost , would rise to c.50%, relatively high compared against its S-REIT peers.
As the decision to proceed is still pending Allco getting the required mandate and assessing the financial viability of this project. As such it will be too premature to assume any financial impact given that plans are still tentative. As such, we are maintaining, our earnings forecast for FY08 -FY09 and look forward to further data points and newsflow from Allco with regards to plans on CSC.
Hence, we maintain our recommendation and target price of $1.23. Based on its last closing price of $0.76, Allco is trading at an attractive 0.5x P/BV and a FY08- 09 DPU yield of 8.4-8.5%. For exposure to office sector, we prefer CCT (TP $2.93) and Suntec ( TP $1.98) given a more attractive DPU FY07-09 DPU growth in excess of c.20% and c.9% respectively.