Month: July 2009
FSL – OCBC
HOLD on covenants and counterparties
Watch for DPU guidance next week. FSL Trust (FSLT) will announce 2Q results next week on 21 Jul. We do not expect any big earnings surprises, and accordingly our attention will be on DPU. The trust had previously guided for 2Q distributions of 2.45 US cents per unit. Two key pieces of information to look out for: 1) whether the distribution reinvestment scheme (DRS) will apply this quarter; and 2) guidance for 3Q DPU. FSLT changed its ‘100% payout’ model in 1Q09, by scaling back payout and instituting the DRS. We have previously noted that the relative success of the DRS in the last quarter may protect the trust’s distribution payout ratio from further cuts.
Pre-paying loans may not be enough. Of course, this depends on the trust’s lenders reaction to FSLT’s attempts to voluntary prepay loans. Last quarter, a total of US$7.8m (roughly 46% of 1Q cash earnings) was earmarked to voluntarily prepay debt. US$3.8m stemmed from DRS proceeds, while US$4m was from retained cash earnings. We note that this amount is still small compared both to total loans and to our expectations of the quantum of the decline in vessel values.
Possibly seeking covenant waivers. We estimate that FSLT’s next vessel valuation will be in the Oct/Nov period (but lenders can call for a revaluation at any time). We believe the question here is not really if the loan-to-value (LTV) covenant has been breached but the tolerance level of lenders to such a breach. Peer Rickmers Maritime [SELL, fair value: S$0.39] had previously announced it is negotiating for LTV covenant waivers with its lenders, while US peers such as Danaos [NOT RATED] and Global Ship Lease [NR] have recently announced successful grants/extensions of such waivers. We expect FSLT to also negotiate for the same – in our opinion, it should be able to secure such waivers but our concern is with pricing. A possible cost structure could be a combination of one-time fees along with higher interest margins over the waiver period.
Covenants and counterparties. We have a NEUTRAL view on the shipping trust sector. We like FSLT’s diversification but the shipping industry is undeniably facing tough times. As such, our concerns on covenants and counterparty health remain unchanged. Securing an LTV covenant waiver could be an important next step for FSLT. Maintain HOLD with S$0.58 fair value estimate. This values FSLT at a 30% discount to our ‘normal’ case discounted FCFE value of S$0.83 (10% discount rate).
Industrial REITs – Daiwa
2Q09 preview – some minor deterioration expected
What has changed?
• The Singapore-listed real-estate investment trusts (S-REITs) in the industrial space are due to be among the first to announce their 2Q09 results, from 17 July.
Impact
• We expect minor (0.6-2.6%) quarter-on-quarter declines in net-property income (NPI) arising from a slight uptrend in overall vacancy rates and a more challenging leasing environment (for renewals).
• We expect year-on-year declines in their distribution-per-unit (DPU) due to equity fundraising for Ascendas REIT (AREIT) and Mapletree Logistics Trust (MLT), and higher borrowing costs for Cambridge Industrial Trust (Cambridge).
Valuation
• We believe the implied trading yields (implied cap rates) of 8.1% for MLT and 10.9% for Cambridge (based on our estimates) are attractive relative to the cap rate of 7% for Singapore industrial properties. From this perspective, AREIT is unattractive, at an implied trading yield (based on our estimates) of about 6.6%.
Catalysts and action
• We maintain our Negative rating for the industrial segment, and our 4 (Underperform) rating for AREIT, which we believe continues to trade at an excessive premium (at a price to NAV of 0.94x) to the sector and its industrial peers.
• We believe the biggest risk to this segment is the relentless decline in asset values, down 7-11.3% QoQ for 2Q09 and in line with similar quarter-on-quarter falls for industrial rents, according to Jones Lang LaSalle.
• We maintain our 3 (Hold) rating for MLT as we believe it offers reasonable value, but little else now that its acquisition-growth model has stalled.
• Our top pick in this segment is Cambridge, 1 (Buy) rating, for its attractive valuations and, in our opinion, highly defensive lease-renewal profile. We believe a positive price trigger for Cambridge would be a well-timed asset disposal that would help reduce gearing.
FCT – UOBKH
Anchored To Resilience In The Heartlands
Dichotomy in the retail market. Suburban malls are resilient and hardly affected by the financial crisis due to a change in behaviour with consumers visibly trading down to stretch every dollar. On the other hand, shopping malls along Orchard Road suffer from a triple whammy, namely: a) local consumers tightening their belts and doing more shopping at suburban malls, b) tourist arrivals falling due to the outbreak of influenza A (H1N1) and c) intense competition with 1,384,000sf of retail space being added this year.
Resilient portfolio of suburban malls. Shopper traffic remains healthy in Jul 09 after the Great Singapore Sale (GSS) held in May-Jun 09. Thus, management expects positive rental reversion to be sustainable, going into 2HFY09. Management is confident that valuation will hold up when investment properties are revalued in Sep 09 due to positive rental reversion. In particular, there is room for the valuation of Northpoint to increase due to Asset Enhancement
Initiative (AEI) and subsequent growth in rental income. Gearing will therefore remain below 30%.
Scenario analysis. We conducted a scenario analysis for the acquisition of Northpoint 2 and YewTee Point, assuming the transactions will complete in Dec 10. These acquisitions will be funded by 50% debt and 50% equity, assuming gearing of 35% post-acquisition. Our conclusion: embarking on equity fund raising through a private placement affects unitholders’ value as current share price is well below intrinsic value and the stock is undervalued. We estimate that
a private placement at S$0.80/share, representing 10.1% discount to yesterday’s closing price of S$0.89, dilutes FY10 DPU by 6.0% to 7.6% and reduces the target price by 5.8% to 7.9%.
Frasers Centrepoint Trust (FCT) focuses on suburban malls located next to the Mass Rapid Transit (MRT) stations, which cater to basic necessities and nondiscretionary spending by captive populations in HDB heartlands. Our target price for the stock is S$1.39, based on the Dividend Discount Model (required rate of return: 7.7%, terminal growth: 2.5%). FCT provides FY10 distribution yield of 8.7% and trades at 27.6% discount to NAV/share of S$1.23.
StarHill – SGX
Further to the announcement dated 22 June 2009 made by YTL Pacific Star REIT Management Limited, as manager of Starhill Global Real Estate Investment Trust (“Starhill Global REIT” and as manager of Starhill Global REIT, the “Manager”), in connection with the proposed fully underwritten renounceable rights issue (the “Rights Issue”) of 963,724,106 new units in Starhill Global REIT (“Rights Units”), the Manager wishes to announce that the Transfer Books and Register of unitholders of Starhill Global REIT (“Unitholders”) will be closed on 21 July 2009 at 5.00 p.m. (the “Rights Issue Books Closure Date”) for the purpose of determining the provisional allotments of Rights Units of Eligible Unitholders1 under the Rights Issue.
In connection with the Rights Issue, Eligible Unitholders will receive their provisional allotments of Rights Units on the basis of one Rights Unit for every one existing Unit2 held by each Eligible Unitholder as at the Rights Issue Books Closure Date.
Starhill Global REIT’s current policy is to distribute its distributable income on a quarterly basis to Unitholders. The Rights Units will, upon allotment and issue, rank pari passu in all respects with the existing Units in issue as at the date of issue of the Rights Units, including the right to any distributions which may accrue for the period from 1 July 2009 to 30 September 2009 as well as all distributions thereafter.
FCT – DBS
Stability and Growth
• Primed for growth from potential pipeline
• BUY for growth + stability, TP of S$0.97 offers 18% total return
have to be yield accretive to the portfolio and to unitholders. In addition, other than Northpoint 2, Yew Tee Point, another sub-urban mall, has recently been completed. If these 2 assets are injected into FCT, its portfolio NLA could potentially grow by up to c.23%.