Month: May 2009
CCT – Nomura
First look
Friday in Singapore, CCT announced a 1-for-1 rights issue to raise S$828.3mn in gross proceeds — a move we anticipated but the rights units are priced at a steeper discount than what we had factored into our model. While this means our price target has to be lowered to reflect more dilution, adjusted for rights, the stock still trades at an undemanding implied EV of S$1,113psf for CCT’s office space. It appears CCT’s good quality, prime commercial assets remain undervalued.
Pre-empting revaluation deficit
CCT – CIMB
Dilutive cash call
1-for-1 renounceable rights issue to raise S$828.3m
Last Friday, CCT proposed a renounceable 1-for-1 rights issue to raise gross proceeds of S$828.3m. The rights will be fully underwritten by DBS, Cazenove and UOB. All eligible unitholders will be entitled to subscribe for one rights unit offered at S$0.59/unit. This is a 44.3% discount to CCT’s closing price of S$1.06 on 21 May 09; a 28.5% discount to its theoretical ex-rights price (TERP) of S$0.825/unit; and a 60.9% discount to its adjusted NAV of S$1.51 (taking into account valuations as at 22 May 09 and the completion of the rights issue).
Parent CapitaLand (CAPL SP, S$3.43, Underperform, target price S$1.84) has committed to a full subscription of its pro-rated entitlement, thus maintaining its 31.4% shareholding in CCT.
New SGX measures: unitholders’ approval not required. In order to facilitate fundraising, the Singapore Exchange had announced on 19 Feb 09 that it would be allowing listed issuers to issue up to 100% of their issued share capitals via pro-rated renounceable rights issues, up from the previous limit of 50%. Hence, unitholders’ approval is not required for this proposed rights issue, although in-principle approval from SGX is still pending.
Asset values down 10% since Dec 08. CCT’s portfolio was valued at S$6,029.6m as at 22 May. Desktop valuations reflect asset-value declines of S$681m (or 10.1%) from 1 Dec 08. Cap rates for Raffles City had increased 0.1% for the three components (office, retail and hotel), while rates for the rest of the portfolio were unchanged. However, the valuers – Jones Lang LaSalle and Knight Frank – had assumed sharper rental declines of 47-70% between now and end-2012. These represent a projected straight-line decline of 20% p.a., in line with market expectations. We understand that occupancy assumptions have also been pared down although management did not elaborate on the extent. After this valuation, CCT’s asset leverage will be 43.1%, up from 38.3% as at 31 Mar 09.
Cash call to pare down debt. Management intends to allocate 85-95% of the gross proceeds to reduce borrowings of S$2.6bn as at 31 Mar 09. The balance will be used for capital expenditure, general corporate and working capital purposes, and expenses in connection with the rights issue. After the rights issue, the company estimates that its asset leverage will decrease to about 30.7% from 38.3% in 1Q09.
Valuation and recommendation
Disappointed but not surprised. CCT’s rights issue will be painfully dilutive, in our view. We note that last quarter’s stated NAV of S$2.49 will be eroded by 40% down to S$1.51 post rights issue. Out of this, only 10% is accounted by asset devaluation, and the remaining from the share base dilution. Nonetheless, at a 44.3% discount to its last traded price, there is little reason for investors not to take up the offer. Estimated dividend yields of 11.6% based on the rights price of S$0.59 are in line with CMT’s offer at 11.4%. Despite CCT’s significant debt over 2010-12, we earlier believed that CCT would have the capacity to refinance with straight debt. This stems from the fact that its parent remains well-capitalised. CCT’s average cost of debt remains low at 3.6%. About S$665m of CCT’s S$1bn MTN programme is still untapped, and S$2bn worth of assets remain unencumbered. Our belief had been further strengthened by Suntec REIT’s (SUN SP, Not Rated) successful refinancing of more than S$825m, even without a strong sponsor. Hence, we were disappointed by the announcement, and the implied dilution.
No doubt, the decision to make a cash call was catalysed by positive market reactions to the succession of cash calls from CapitaMall Trust, CapitaLand and KepLand. Conditions were encouraging after a 74% price rally (from a low of S$0.61 in Mar 09) and the timely waiver of the requirement for unitholders’ approval for up to 100% of its issued share capital via a pro-rated renounceable rights issue. A lower leverage will relieve pressure on the management to refinance consecutive years of large debt, which could grow increasingly difficult, particularly when the outlook for office-sector rents remains bleak for the next four years, and asset values may fall further.
Downgrade to Underperform from Outperform; new target price of S$0.71 (from S$1.12). We factor in an increased share base from the rights issue and our DPU estimates fall by 37-39% for 2009-11. Our post-rights target price is S$0.71, down from S$1.12. While the rights issue is likely to remove the funding overhang for CCT, and we could see a short-lived price rally till the end of “cum-rights” trading on 2 Jun 09, we see almost no reason for any earnings upgrade in the medium term, as upcoming office supply over the next few years remains significant.
We recommend existing investors to switch to our sector top pick Fraser Centrepoint Trust at 0.68x P/BV for its strong balance sheet, lack of refinancing concerns and exposure to the more resilient suburban mall sector.
Rickmers – BT
Rickmers sees higher Q2 income
* Expects higher distributable income in Q2 on new vessels
* 3 more ships due ’09, funding not secured for next yr ships
* Sees gradual recovery of container freight rates by Q3
Singapore-listed Rickmers Maritime expects increased distributable income in its second quarter on the back of new vessels, with another three due later this year when it sees a gradual recovery in freight rates.
Charter rates have likely bottomed, and there might be a gradual upwards correction in container freight rates by the third quarter, a traditional peak season for container shipping, the CEO of the shipping trust told Reuters on Monday.
‘We took delivery of a few ships in the early part of Q2, which we didn’t have in Q1, so that should affect the numbers accordingly,’ Thomas Preben Hansen, CEO of Rickmers Trust Management, said in an interview. ‘As we add ships to our portfolio, our revenue increases and our distributable cash flow should increase accordingly,’ he added.
A triple whammy of weak consumer demand, ship oversupply and the re-stocking of iron ore inventories at Chinese ports in the past 3-4 weeks have kept shipping rates under pressure.
Rickmers expects full contribution in the second quarter from two new ships delivered earlier this year, one leased to Korea’s Hanjin Shipping and the other to Japan’s Mitsui OSK Lines.
It has seven outstanding committed vessel buys, three vessels leased to Hanjin due later this year, and four vessels leased to AP Moller-Maersk due next year, but the funding for the latter has not been secured.
‘We’ve gone from an environment where there was an abundant amount of bank financing for shipping, to currently going through a period where the appetite for shipping financing has been reduced. But ship financing will return to the market,’ he said.
Rickmers and the other two Singapore-listed shipping trusts, Pacific Shipping Trust and First Ship Lease Trust, generally offer higher yields than Singapore-listed real estate investment trusts, because ships typically have a lifespan of 25-30 years.
Rickmers reported a 60 per cent increase in first quarter distributable income to US$19.6 million, on revenue of US$32.5 million. Its shares have risen 14 per cent so far this year, versus a 29 per cent gain in the broader Singapore index.
CCT – JPM
Pricing in the rights issue
• 1-for-1 rights issue announced to raise S$828.3 million. CCT announced that it will issue 1.4 billion new shares through a 1-for-1 rights issue, priced at S$0.59/rights unit to raise S$828.3 million. The rights issue is fully underwritten, and CapitaLand will take up their prorata share of 31.4%. The proceeds from the rights issue will be primarily used to reduce the borrowings. In addition to the rights issue announcement, the trust has revalued its investment property down by 10.1% to S$6billion. Assuming debt is reduced by S$760million, gearing will be 30.7% post rights issue and devaluation.
• Adjusting our estimates for rights, Dec-09 price target of S$0.85. We have revised down our DPU estimates for FY09/FY10 by 41%/38% to account for the rights issue, and book value has been reduced by about 40% to S$1.52/unit for 2009. Based on a discount rate of 8.0% (8.6% previously), our new Dec-09 DDM-based price target is S$0.85/unit (S$0.81/unit previously).
• Short-term risk biased on the upside, but operating fundamentals remain challenging. The announcement of the fully underwritten rights issue would, in our view, remove the EFR overhang on CCT, and we do see some short-term upside risk to the share price. That said, we believe that operating fundamentals are still challenging in the medium term and that the current share price largely reflects the income stream from the underlying portfolio based on post rights NPV. We therefore retain our Neutral rating on CCT.
• Key risks to our rating and price target on the upside include 1) market’s increasing risk appetite for relatively higher beta stocks; 2) a quicker-than-expected bottoming out and recovery of the rental market. Key downside risks include a worse than expected rental reversion.