Month: July 2009
FSL – OCBC
Finally looking sustainable – upgrade to BUY
New amortizing strategy. FSL Trust’s 2Q results were in line with our expectations. As per guidance, 2Q DPU is 2.45 US cents. Key for us: FSLT has introduced longer-term DPU guidance from 3Q09 onwards – the trust is targeting a payout of 1.5 US cents per quarter or around 50% of free cash flows. Retained cash will principally be used to prepay loans. We understand this new guidance is driven by discussions with lenders. We expect loan-to-value covenant concerns to become a non-issue once these discussions conclude. Everything has a price of course, and here lenders look to be demanding a new amortizing strategy and likely higher interest margins. Our new assumptions: 1) FSLT will pay down around US$35m of debt every year; 2) all-in interest costs will rise from about 5.25% to 5.85%. This is subject to revision when the actual agreement is finalized and disclosed.
Finally looking sustainable. 3Q DPU is down to even below IPO levels (with 13 vessels then versus 23 now). Unitholders will have to accept that this reduced payout is the hangover after the 100% payout “party” they have enjoyed for so long. A consolation – in our opinion, this is finally a realistic number. Right since when we initiated coverage over a year ago, we have been saying the trust’s aggressive payout was unsustainable. With this new approach, FSLT now looks more like a viable long-term investment vehicle for serious shipping trust investors.
Expect stability, not growth (without new equity). We reiterate that the time for steadily accelerating DPU has gone. Meaningful DPU growth will necessitate acquisitions – but in our opinion, any new vessel buys would need to be financed on the back of fresh equity. Consequently, unitholders should constrain their expectations to a stable stream of income based on the 50% payout regime.
Upgrading to BUY. Our updated discounted FCFE value for FSLT is S$0.84 (10% discount rate, prev: S$0.83). In our view, the balance sheet side of the trust’s challenges is mostly resolved (with conditions/pricing still uncertain). The other concern that remains (industry-wide) is counterparty risks. We ascribe a 10% “industry uncertainty” discount to reach a fair value estimate of S$0.76 (prev: S$0.58). This implies a total return of about 28% (15% upside, 13% yield). We like FSLT because of its 1) new more sustainable business model; and 2) its diversified vessel mix of containers, tankers and dry bulk carriers. For these reasons, FSLT is now our top pick for the sector. Upgrade to BUY.
FSL – DBS
DPU cut will pay off in long run
• Guides for lower DPU payout of 1.50UScts from 3Q09 onwards, down from 2Q09 DPU of 2.45UScts
• Move will accommodate amortizing loan structure to avoid breaching loan covenants
• FY10 dividend yield still a healthy 13%
• Maintain BUY on easing covenant/ refinancing concerns, target price revised up slightly to S$0.72
Move necessary to sustain business model. While 2Q09 DPU of 2.45UScts was in line with previous guidance, management sprang a surprise by reducing its DPU guidance to 1.50UScts from 3Q09 onwards – down 39% from the current level. This would translate to a payout ratio of about 50% of its quarterly cash generated, and the remaining cash (about US$8m) would be used for debt prepayment as described below.
From bullet loans to amortizing. To avoid breaching the loan-to-value covenants on its borrowings, management is in the process of working out an agreement with its lenders – whereby they prepay debts on a regular basis in exchange for the covenant waiver. In effect, this is a shift to an amortizing loan structure.
Valuation should reflect lower risks, better growth prospects. While we cut our FY09 and FY10 DPU forecasts by 20% and 38%, respectively, we look forward to a more sustainable quarterly DPU of 1.50UScts and a definitive agreement with lenders in the
near term. Moreover, once the covenant breach uncertainty is out of the way, FSLT may find it easier to tap the equity markets and acquire potentially DPUaccretive assets at cheap valuations. Thus, with the stock trading at 13% FY10 yield, we still find the risk-reward ratio favourable and maintain BUY at a TP of S$0.72.
CCT – CIMB
Positive reversions held up distribution
• In line. 2Q09 results were in line with Street and our expectations. Net property income of S$73.3m was up 42% yoy and 5% qoq, aided by strong rental reversions and improved operating margins. Distributable income for 2Q09 was up 33% yoy. However, DPU of 1.7cts (24% of our full-year forecast) declined 34% yoy due to a bigger unit base after its rights issue. 1H09 DPU of 3.33cts was in line with
expectations, forming 47% of our full-year estimate.
• Reversions remained 45% above the last signed. Reversions for office rents were 45% above previous rental levels. Average monthly passing rents for the portfolio rose 5% qoq to S$8.14psf from S$7.73psf in 1Q09. Management commented that while typical lease periods remained three years, there were a few negotiations for longer leases such as five years. There was also increased interest
from prospective tenants from outside the CBD to take up core CBD space as market rents had come down substantially.
• Portfolio occupancy down 0.5%. CCT’s portfolio occupancy dipped to 96.2% from 96.7% in the last quarter. We observe more significant weakening at Golden Shoe Carpark (-6.4%), Bugis Village (-2.9%) and One George Street (-6.6%). On the other hand, occupancy at Market Street Carpark (+29.2%) and Wilke Edge (+5.6%) improved much, holding up overall occupancy.
• Asset leverage down to 31%. On 3 Jul 09, CCT repaid S$664m of borrowings, which brought its asset leverage down to 31% from 42% as at 30 Jun 09.
• Maintain Underperform and DDM-based target price of S$0.76 (discount 10.2%). We expect occupancy to continue to weaken in the year, weighed down by weak demand and strong upcoming supply. Over 2010-11, we expect reversions to turn negative for CCT as rents for expiring leases in two of its major buildings Six Battery Road and Raffles City are significantly higher than current market rents
(S$7-8psf), and anticipated future rents (S$5-6psf). We maintain our estimates and Underperform rating as catalysts in the medium term are still lacking.
First Reit – SGX
First REIT’s 2Q 2009 distributable income up 1.5% to S$5.3 million
DPU for the period increased 0.5% to 1.92 cents per unit
Annualised DPU of 7.66 Singapore cents translates to distribution yield of 11.3%
Resilient revenue structure
Low debt-to-property valuation ratio at 15.6%
SINGAPORE – 23 July 2009 – Bowsprit Capital Corporation Limited (“Bowsprit”), the Manager of First Real Estate Investment Trust (“First REIT”), Singapore‟s first healthcare real estate investment trust, today announced that its distributable income for the three months ended 30 June 2009 (“2Q 2009”) rose 1.5% to S$5.3 million.
The latest quarterly results confirm First REIT‟s resilient rental revenue structure. First REIT‟s distribution per unit (“DPU”) also rose 0.5% to 1.92 Singapore cents. Based on its closing price of S$0.675 on 21 July 2009 and the annualised DPU of 7.66 Singapore cents, First REIT registered a distribution yield of 11.3% at the end of the period.
ART – DBS
More room to run
• Results above street estimates
• Stability emerging – 2H09 should turn stronger
• Upgrade to BUY, TP S$0.99, offering total return of 22%.
Results higher than street. ART reported a commendable set of results, beating market expectations but in line with our estimates. 2Q09 distribution income came in 17% lower yoy to $11m (DPU 1.79cts). This was achieved on the back of a 7% dip in revenue to $43m and an 11% drop in gross profit (GP) to $23.4m. Signs of stabilization are emerging with topline, GP and distribution income recording single digit growth on a qoq basis. The group wrote down value of its assets by $61m or 4% of total portfolio value, largely from its Japanese and Chinese assets. Thus, book NAV declined to $1.36/unit. Consequently, gearing rose to 41%.
Stability emerging. Operating condition was challenging in 2Q09 with RevPAU dipping to $119, hindered by Singapore and China segments. Weaker business demand and competition from new supply in Beijing and Shanghai were a drag on RevPAU. The slide was partially offset by better contributions from Australia, Philippines and Vietnam. Looking ahead, there are nascent signs of demand leveling out, particularly in Spore (15% of revenue) with more take up from project groups. Australia, Vietnam and Philippines are expected to remain fairly stable. Management indicated that the present gearing of 41% and ICR of 3.4x are still within their optimal target of 45% and
ICR of 3x, and is unlikely to tap capital markets in the near term.
Upgrade to BUY. We are raising our FY09 and FY10 DPU estimates by 0.7% and 6% respectively to 7.2cts and 7.4cts, on the back of an improving operating environment. We have also adjusted our TP to S$0.99, assuming a slightly higher terminal growth of 2%, which is not excessive, given that half of its portfolio is in emerging markets. ART is one of the key beneficiaries of the global economic recovery, given its focus on corporate medium term accommodation demand and diversified tenant base. Expectations of positive GDP growth in the Asia Pacific region as well as event driven catalysts, such as completion of the 2 IRs in Singapore next year, should likely have a positive impact on the longer stay market.