Month: November 2008
CCT – CIMB
Rising from the ashes
• Top pick in commercial sector, upgrade to Outperform from Underperform. CCT is the largest REIT office landlord with almost 3.5m sf of commercial space. Even with asset devaluation, the likelihood of breaching impairment levels is limited. To reach impairment, CCT’s assets would have to be devalued by 40% over a single year. Assuming a 20% devaluation, CCT would still remain within 45% gearing, which is the optimal level. With management’s track record in past refinancing and access to debt markets, as well as support from sponsor CapitaLand, we believe that it should be able to secure refinancing.
• Concerns already priced in. We have priced in occupancy levels falling to the last crisis levels but with moderate rental declines in view of CCT’s resilient income from 5-year minimum income support for One George Street, long leases for HSBC Building and a stable retail segment in Raffles City. We also increased our cost of debt to 5%, 140bp above its current all-in cost of debt of 3.6%. Despite this, forward yields for CCT remain attractive at 11% for a portfolio of its quality.
• Unchanged DDM-derived target price of S$1.17 (discount rate 10.4%). At our target price of S$1.17, CCT has potential price upside of 30%, vs. the potential 15% upside for the STI. We upgrade CCT to Outperform from Underperform based on valuation. The sharp fall in its share price has more than compensated for various concerns, in our opinion. Early success in securing refinancing before Mar 09 may provide a catalyst for the stock. At 0.29x price to NAV, CCT is the second-lowest valued REIT after FCOT (0.21x). We believe this is an opportune time to accumulate the stock at such attractive levels.
Cambridge – CIMB
Worth a chance
• Maintain Outperform. We expect new demand for industrial space to ebb in tandem with an expected economic downturn. CCT has a small asset size with tenant concentration risk, unlike its much larger peers, A-REIT and MLT. Nonetheless, we expect its rental income to stay visible in the medium term with all its tenants on long leaseback arrangements with built-in rent increases. Management is working on the refinancing of significant short-term debt that would be due by Feb 09 and early closure could provide catalysts in the short term.
• Unchanged DDM-derived target price of S$0.52 (discount rate 9.6%). Despite our earlier increase in cost-of-debt assumptions, forward dividend yield in FY09 remains attractive at 17.3% due to overselling of the stock. CIT remains the cheapest industrial REIT under our coverage, with a P/BV of 0.36x and forward yields of 17.3%. S-REITs are trading at 0.51x P/BV and forward yields of 13.6% on average. We remain positive on the resilience of the industrial sector, anchored by a long weighted average remaining lease term of 5.9 years in CIT’s case. Maintain Outperform.
ART – CIMB
Changing seasons
• Maintain Underperform. ART’s 9M08 earnings performance had been good. However, management guides that the fourth quarter is typically the weakest. REVPAU in China which had surged during the Olympics Games is likely to normalise. The global economic downturn would have a material impact on international travel and the outlook looks bleak even for the serviced apartment industry.
• RevPAU cut by up to 20%. In line with our house view that the US financial crisis could result in a marked slowdown in Asia, we recently cut our REVPAU forecasts (a function of occupancy and average daily rates) by up to 20% per annum for the next three years. Separately, we removed all acquisition assumptions for FY09. We also raised our cost-of-debt assumption for ART to 3.5% from 4% for FY08.
• Unchanged DDM-derived target price of S$0.56 (discount rate 10.5%). Current P/BV appears attractive at 0.4x relative to the S-REIT’s 0.51x. However, price catalysts are likely to be limited with the cloudy outlook for leisure and business travel.
AREIT – CIMB
Sailing the storm
• Maintain Outperform. We expect A-REIT’s income streams to come from its current development projects as well as built-in rental increases on its long leases. Additionally, management had been able to secure refinancing for S$500m of debt on a long-term basis almost one year before debt maturity on attractive rates and without the need to pledge assets or rental streams. This speaks volumes about the strength of its banking relationships. Reducing secured borrowings will afford AREIT more financial flexibility going forward.
• Resilient demand and diversified tenant risk. We expect new demand for industrial space to soften in tandem with an expected economic downturn. Nonetheless, existing demand is expected to stay resilient, with a lagged effect of about 18 months between a business slowdown and actual cutbacks in space. AREIT also has minimal tenant concentration risk with a tenant base of 860 as compared with MLT (224) and CIT (43).
• Unchanged DDM target price of S$2.17 (discount rate 8.7%). We continue to like A-REIT for its relatively resilient income streams anchored by long lease tenures, and leadership (through parent Ascendas) of the built-to-suit market. A-REIT remains the best proxy for business and science park space, the highest-quality segment of industrial space in Singapore. Maintain Outperform.
REITs – CIMB
Ripe for the picking
• Looking cheaper than ever. YTD, the Singapore REIT index has fallen 56% (vs. the STI’s 48% decline), driven by fears of REITs’ inability to secure refinancing, and falling rents and occupancy in an economic downturn. Average P/BV for the S-REIT sector has fallen to 0.51 while average yields have doubled to 14% in the last two months.
• REITs with strong credit and risk metrics get gold. Despite the credit crunch, there are still REITs that exhibit strong credit and diversified risk metrics. The presence of strong sponsors and government-linked sponsors is advantageous at this juncture. To these, banks are not only willing to lend but lend on more favourable terms. Some REITs have even managed to move away from borrowings that require pledges on their assets or rental income, thereby retaining financial flexibility.
• Asset devaluation risks small, financing ability not impaired yet. Most of the REITS are still within safe gearing levels. This implies a low risk of breaching impairment levels and could mean debt funding would still be available to them.
• Look for efficiency. In the midst of the credit crunch, acquisitions and asset enhancements requiring significant outlay would be difficult, particularly in 2009. More attention should be focused on the operational efficiency of the REIT manager in pushing every dollar of rent from the top down to the distribution level. CDLHT stands out as an efficient REIT manager with a remarkably close match between its revenue growth (222%) and DPU growth (211%), in our comparison.
• Overweight on S-REITs; top picks are PLife and CCT. With the strong selldown of REITs, we see an opportune time to accumulate positions. We maintain our Outperform ratings on A-REIT, CIT, FCT and PLIfe. We upgrade CCT and MLT to Outperform from Underperform and Neutral respectively. We maintain our Underperform on ART but downgrade CDLHT to Underperform from Neutral. While PLife remains our top pick for its limited earnings downside and strong financial flexibility, CCT emerges as a deep-value pick with the lowest P/BV of 0.28x among REITs under our coverage, and below the S-REIT average of 0.5x. We believe that all negatives have been priced in and forward yields at 12.2% (CY09) look attractive.
Link – Table