Month: October 2009
ART – DBS
Sitting pretty
• Sequential improvement in 3Q09 on the back of improving operational performance
• RevPAU up 4% qoq from higher occupancies
• Maintain BUY, TP S$1.25
Improving operations. Ascott Residence Trust (ART) reported 3Q09 results in line with expectations. While revenues and gross profits were 17% and 21% lower yoy to S$44.4m and S$22.0m owing to a exceptional Beijing Olympics last year, performance showed a sequential improvement from rising demand seen in their Singapore, China, Japan and Indonesian operations. Distributable income came in at S$11.8m (-25% yoy, +7% qoq), translating to a DPU of 1.92 Scts.
RevPAU up 4% qoq – a good sign. We are encouraged by further signs of improvement in ART’s core markets in Singapore, China and Japan. As such, we are adjusting our occupancy estimates upwards by up to 2% to reflect our more positive outlook for travel demand and expansion in annual travel budgets of corporate, thus fueling demand for accommodation. DPU forecast for FY10 and FY11 adjusted up by 2.4% and 2.6%.
Maintain BUY, TP S$1.25. On the back of an improving travel outlook, we are positive that ART will be able to deliver a sustained FY09-11F DPU yield of 6.6 – 7.5%. Maintain BUY, with revised TP of S$1.25 on slightly lower WACC assumptions. (-25 bps). Further upside catalysts will include (i) stronger than expected RevPAU performance in 4q09, (ii) accretive acquisitions.
ART – CIMB
Improving performance, but upside limited
• Downgrade to Neutral from Outperform; unchanged DDM-based target price of S$1.21. ART’s 3Q09 results met Street and our expectations. Although revenue per available unit (REVPAU) improved as we anticipated, and although we remain positive on the hospitality sector, ART has already outperformed since our upgrade early this month, pricing in the positives. Hence we downgrade our recommendation to Neutral from Outperform.
• Results in line. YTD DPU of 5.48cts forms 75% of our full-year forecast. 3Q09 DPU of 1.92cts (26% of full-year forecast) was down 26.4% yoy due mainly to weaker demand for serviced residences in Singapore and China as a result of the global economic slowdown. However, DPU improved 7.3% qoq as REVPAU strengthened across the board. Tighter control of property-related expenses also lifted gross profit by 6% qoq to S$22m.
• Portfolio REVPAU grew. REVPAU, which had been declining since 4Q08, finally grew 4.2% qoq in 3Q09 to reach S$124. The recovery was led by Japan (+24.4% qoq) on the back of a stronger yen, Singapore (+14.9% qoq) and China (+6.8% qoq). REVPAU in three out of its seven countries remained in negative region, including Australia (-6.2%), Vietnam (-1.6%) and the Philippines (-3.5%).
• No changes in assumptions. We continue to expect REVPAU growth to be led by Singapore (+30%), the Philippines (+15%) and Vietnam (+10%) in 2010. Our DPU estimates and DDM-derived target price of S$1.21 are unchanged (discount rate 9.1%).
ART – OCBC
3Q outperforms expectations
Outperforms expectations. Ascott Residence Trust (ART) posted S$44.4m in 3Q09 revenue, down 16.4% YoY but up 3.3% QoQ. Similarly, gross profit declined 21% YoY but increased 5.6% QoQ to S$22m. Portfolio RevPAU for the quarter was S$124 per day compared to S$163 in 3Q08 (-23.9%) and S$119 in 2Q09 (+4.2%). Results outperformed expectations, with revenue and gross profit beating our estimates by 3.5% and 9.9% respectively. 3Q DPU of 1.92 S cents was 6.9% higher than our estimate of 1.80 S cents. Note that distributions are paid on a half-yearly basis.
Occupancy gains drive RevPAU. At 2Q09 results, we had noted that performance in major markets seemed to be leveling off or recovering slightly. This trend continued in 3Q, with improving occupancy levels driving QoQ increases in RevPAU. Singapore was a star performer with RevPAU up 14.9% QoQ, while China saw a smaller QoQ increase of 6.8%. These two major markets are still off 32-44% from their peaks in 3Q08 (an exceptional Olympics-fueled quarter for China). Japan recorded a 24% QoQ increase in RevPAU, which we understand is due largely to forex effects as well as slight occupancy improvements. RevPAU in the other markets was stable or slightly negative QoQ due primarily to forex and/or seasonal effects.
Guidance hopeful but cautious. The manager said that “the severe challenges posed by the global economic downturn to the hospitality industry have eased”. It guided that while it remains cautious of the pace and extent of the recovery, it is “confident of the longer-term growth in the markets” in which ART operates. It also said it is accelerating asset enhancement plans for selected properties. Our view is that the worst is behind ART – we believe Pan-Asian markets, where ART operates, will continue to be attractive FDI destinations. We think ART may shine in the coming months as corporate spend and travel gradually return. The challenge now is increasing, and sustaining, occupancy at levels that allow for a successful increase in unit rates.
Valuations remain attractive. We have revised our estimates to reflect actual 9M09 figures. Our fair value estimate of S$1.19 (unchanged) is derived by charging a 15% discount to our SOTP value of S$1.40 for ART. Fresh equity could be utilized to support asset enhancement plans and fund acquisitions, but we believe our fair value estimate is covered even when fund-raising risks are quantified. ART has re-rated 10% since our last update in September; we continue to find valuations attractive. Maintain BUY.
Cambridge – DBS
Addressing its gearing
At a Glance
• Results slightly above
• Asset restructuring/ dividend re-investment scheme proposed
• Maintain HOLD, TP S$0.49.
Comment on Results
Results slightly above. Cambridge REIT (CIT) results were slightly above estimates. Gross revenues and net property income (NPI) grew by 2.2% to S$18.7m and 1% to S$16.4m respectively on the back of steady occupancies (99.7% in 3Q09). However, distributable income declined 5.5% to S$11.2m largely due to higher interest costs, translating to a DPU of 1.34 Scts.
Moving occupancy assumptions upwards. The out- performance was mainly due to higher than projected occupancy levels, as we expected a slight dip. With improving economic outlook and that less than 3% of leases are up for renewal over the next 3 years, we have moved our occupancy assumptions upwards to be in line with current operational performance, leading to a 8% increase in our forward DPU estimates.
Moving towards gearing of 30-35%. The manager is reviewing ways of reducing the trust’s gearing from 42% to 30-35% level. Various measures are proposed which include (i) divesting certain non-core assets (ranging from S$25m-50m) and proceeds will be channeled towards repaying debt, (ii) a dividend re-investment scheme to conserve cash (possible instituting in 4Q09). The above are currently not included in our current forecasts.
Recommendation
Prospective yields of 11.2%. While we acknowledge that FY09-11F yields of c11% remains attractive, uncertainties from outcome from its portfolio restructuring could likely cap re-rating opportunities in the near term. Maintain HOLD, TP adjusted to S$0.49.
CMT, CRCT – BT
Trump card for CapitaLand in CMA
CAPITALAND’S third-quarter report card released this week was a marked improvement from its showing in the first two quarters of this year. Still, the $167.2 million net profit that it achieved for the first nine months of this year is a far cry from the $1.18 billion in the same period last year.
However, plans to float a stake in its integrated shopping centre business under CapitaMalls Asia (CMA) by the year-end could add handsomely to CapitaLand’s fourth-quarter and full-year bottom lines.
CMA has a net asset value of $5.3 billion but assuming that its assets are valued at 1.5 to two times book value during the initial public offering (IPO), the total market worth of CMA would be about $8-10 billion. If CapitaLand floats a stake of 30 per cent, the pre-tax profit that it stands to book from the IPO could be in the order of $800 million to $1.4 billion.
CapitaLand’s management has indicated that the board may consider recommending a special dividend to shareholders following CMA’s flotation.
UBS Investment Research, in a recent paper, estimates that assuming an $8 billion valuation for CMA and a 30 per cent free float, the special dividend would work out to 27 cents per CapitaLand share if it decides to pay out 50 per cent of the IPO proceeds, and 54 cents per share assuming a 100 per cent payout.
On a $10 billion valuation for CMA and a 40 per cent free float, the payout could range from 45-90 cents per share.
Since CapitaLand announced its plans earlier this month to float CMA, its share price rallied about 21.5 per cent to a high of $4.46 on Monday, although it has given up much of the gain, ending at $4.15 yesterday.
By UBS’s calculations, an $8-10 billion valuation for CMA will add 61 cents to $1.06 to its revalued net asset value (RNAV) per share for CapitaLand, which it estimates at $4.30 based on CMA’s $5.3 billion book value. By launching an IPO, a higher value will be placed on the CMA business than if it remained as an unlisted part of CapitaLand. Or as CapitaLand’s management has put it, its plans to float CMA will ‘unlock shareholder value by crystallising the value of CapitaLand Group’s integrated shopping mall business’.
CapitaLand shareholders stand to gain by approving the group’s plans to float CMA. No doubt it will also be good for members of its management, whose pay packets should benefit from a stronger bottom line. And not to forget JP Morgan, the sole financial adviser.
However, some CapitaLand shareholders may also hold stakes in CapitaMall Trust (CMT) and CapitaRetail China Trust (CRCT), which many analysts reckon may fare less favourably after CMA is listed.
CMT may face short-term price weakness from asset reallocation to CMA, as UBS says. The process has already begun. CMT’s unit price has slipped from $1.82 before the announcement on CMA to yesterday’s closing price of $1.60.
CMA, with a portfolio of 86 malls in China, Singapore, Malaysia, Japan and India, may be more appealing to investors than CMT – which has a presence only in Singapore. CMA’s free float market cap could rival CMT’s. Still, CMA could find it worthwhile to sell assets, such as its 50 per cent stake in ION Orchard, to CMT given the tax transparency that CMT, as a real estate investment trust (Reit), enjoys in Singapore. In other words, if ION remains in CMA, the income from the mall will be taxed at the corporate tax rate (at the vehicle or CMA level). If however, ION is sold to CMT, the mall’s income will be exempt from payment of corporate tax at the Reit/vehicle level, under the tax flow-through allowed for Singapore Reits.
So CMA will retain an incentive (from the viewpoint of this tax saving at least) to develop, warehouse and sell assets to CMT – pretty much the arrangement that now exists between CapitaLand and CMT.
However, this may not be the case for CRCT. That’s because CRCT does not enjoy tax transparency since its income is derived from the ownership of malls in China, where it has to pay taxes on the income before it can bring it to Singapore.
This being the case, there could be less incentive for CMA to offload its China malls in future to CRCT. In fact, it may diminish or extinguish the raison d’etre of CRCT.
When CapitaLand floated CRCT in December 2006, it had planned to grow its initial $690 million portfolio of seven malls in China to $3 billion by end-2009. So far, it hasn’t been very successful. Today, its portfolio comprises eight malls worth $1.2 billion.
Who knows, CapitaLand could eventually privatise CRCT and let its China malls business sit entirely in CMA. This could provide a nice exit for CRCT shareholders.
These are some questions that CapitaLand shareholders who also own units in CMT and CRCT may ponder as they vote tomorrow on CapitaLand’s plans to float CMA.