Month: May 2010
CMT – OCBC
Share price correction presents fresh buying Opportunity
Groundbreaking at JCube development. Last Friday, CapitaMall Trust (CMT) held the groundbreaking ceremony for the new retail mall on the site of the former Jurong Entertainment Centre. The new mall, named JCube, will have net lettable area of approximately 204,000 sq ft, which is twice the original size. The project is expected to be completed in the first quarter of 2012. We expect JCube to be the key DPU growth driver for CMT in 2012 and 2013. Based on the enlarged NLA, we expect JCube to generate gross rental income of S$34.7m and net property income of S$23.9m when fully operational. With the changes in our NLA and rental estimates on JCube, our RNAV estimate has been raised by S$0.02 per share.
Development of Jurong Lake District to boost human traffic flow. Long-term outlook for the JCube development is also positive with development of the Jurong Lake District now gaining momentum. In Apr, URA launched a 205.854 sq ft land parcel for mix development in Jurong Lake District after a developer committed to bid at least S$350m for the site. In addition, URA recently sold a residential site at Boon Lay Way to Keppel Land for S$303m. Upon the completion of these projects, we expect higher human traffic flow in the Jurong Lake District and JCube, which is strategically located near the Jurong East MRT Interchange, should be a key beneficiary from the development of the region.
Positioned to grow over the long term. In the near term, we see DPU growth catalysts coming from positive rent reversion and asset enhancement (AEI) initiatives at Raffles City basement, Junction 8 (new 2-storey F&B Annex Block) and Tampines Mall (reconfiguration of shop units and side entrance). These AEI works will complete by end-2010. Over the longer term, there is still a healthy pipeline of AEIs that CMT could undertake. CMT has received planning permission from URA to increase the GFA of Tampines Mall by 94,938 sq ft for office use. For Funan DigitaLife Mall, CMT has also received planning permission from URA to increase the GFA by 360,375 sq ft (163,180 sq ft for office use and 197,195 sq ft for retail use). These projects are likely to start once when the development of JCube is completed.
Share price correction presents fresh buying opportunity; Upgrade to BUY. Our fair value, which pegged at parity to our RNAV estimate, has been raised to S$1.95 (previously S$1.93). Recent correction in CMT’s share price presents fresh buying opportunity for investors. With a projected total return of 13%, we are now upgrading CMT to BUY.
CitySpring – OCBC
Exposed to regulatory risk
4Q10 outperforms on Basslink. CitySpring Infrastructure Trust (CitySpring) posted S$118m in 4Q10 revenue, up 21.3% YoY and 23.9% QoQ. Cash earnings also rose 7.4% YoY and 115% QoQ to S$23.4m. This was 16.5% above our estimate, despite continuing poor performance by City Gas due to the timing mismatch between City Gas’ tariff revenue and fuel costs; cash earnings at City Gas fell 47% YoY but increased 28.7% QoQ to S$8.5m. Basslink was the key contributor that lifted 4Q10 results due to positive Commercial Risk Sharing Mechanism (CRSM) payments and contributions from its telecoms services business. The trust will distribute 1.05 S cents per unit to unitholders for 4Q10, flat QoQ but down 40% YoY on the enlarged unit base post-rights issue.
Exposed to regulatory risk. While the inherent nature of the three businesses owned by the trust is fairly stable, we believe CitySpring is exposed to regulatory risk on two fronts. The lesser of the two risks stems from the ongoing1 discussions with Australia’s Hydro Tasmania (owned by the State of Tasmania), which is demanding an additional A$6.9m in CRSM payments from Basslink for CY2009. While the amount is relatively small, if Hydro Tasmania’s interpretation of the agreement has merit, it could have negative implications for future CRSM calculations. The greater of the two risks is on the talks with regulator Energy Market Authority (EMA) regarding the conversion, and ensuing liberalization, of the City Gas town gas network. The key negotiation uncertainties are: 1) grant of franchise monopoly status during the conversion period; 2) recovery of costs incurred in the conversion project; 3) the magnitude of any return on capital allowed through a levy determined by the EMA; and 4) the regulatory climate post-conversion and post-liberalization. We expect both these issues to play out over the next 12 months, creating (in our opinion) a significant overhang on the unit price.
A more cautious valuation. The manager said it is targeting for a DPU of 4.20 S cents or 1.05 S cents per quarter (unchanged from current level) for FY11. This is equivalent to a yield of 7.06% on yesterday’s closing price of S$0.595. Our DDM-derived valuation of CitySpring is now utilizing a higher discount rate of 7.2%, up from 6.4% previously. We believe investors should demand a higher risk premium, both on broader market uncertainties and the regulatory risks discussed earlier. Downgrade to HOLD with a revised fair value of S$0.60 [prev: S$0.68], or an estimated total return of 7.9%.
CitySpring – DBS
Looks to be a safe bet
• 4Q10 cash earnings of S$24m better-than-expected
• DPU of 1.05Scts for 4Q10 in line; maintains similar quarterly guidance for full year-FY11
• Secure yield of 7.2% thus promises relative stability amidst markets spooked by macro concerns
• Upgrade to BUY at a revised TP of S$0.67
Basslink contribution props up numbers. The Group recorded net adjusted cash earnings of S$23.7m in 4Q10, up 10% y-o-y and more than double of the S$11m generated in 3Q10. This strong performance was driven by higher revenue contribution from Basslink – as a result of higher availability fees, higher Commercial Risk Sharing Mechanism (“CRSM”) payments from Hydro Tasmania and Telecom revenues. City Gas cash earnings, though, failed to fully make up for the shortfalls recorded earlier in the year, despite recovering 29% q-o-q in 4Q10 owing to relative stability in High Sulphur Fuel Oil (“HSFO”) prices.
Maintains 4.20Scts DPU guidance for FY11. We expect FY11 cash generation to be stable, compared to FY10, while CityGas earnings could potentially be better, owing to full year contribution from customers in newly opened malls and Integrated Resorts, and lower HSFO prices. Hence, we remain confident of management meeting their DPU guidance for FY11, barring any major M&A activity. The CRSM issue with Hydro Tasmania or negotiations on CityGas’ gas conversion programme is unlikely to affect payouts. Gross cash of about S$100m provides a buffer.
Safe and steady is good, for now. Given the evolving macro uncertainties arising from the risks of a slowdown in EZ, CitySpring looks like a relatively safe investment with stable assets largely insulated from economic cycles. Given that financing concerns have been largely resolved as well, we upgrade the stock to BUY with a revised DDM-based TP of S$0.67 (as we lower our WACC from 8.0% to 7.5%).
Industrial REITs – OCBC
On stronger footing
Stronger balance sheets. The industrial REIT sub-sector is in much a stronger position, in our view, compared to a year ago. REITs including A-REIT, Mapletree Logistics Trust, AIMS AMP Capital Industrial REIT [AAREIT, NOT RATED] and Cambridge Industrial Trust [NR] have all raised fresh equity within the past year or so. The sub-sector is on average geared at 33.5% debt-to-assets versus the broader S-REIT average of 30.6%. While the level of debt has decreased generally, there are still pockets of industrial REITs with higher leverage. Leverage levels range from 25% (Cache Logistics Trust, NR) to 42.6% (Cambridge).
Expecting some stability. The managers for the most part presented a cautiously optimistic outlook going forward – both in terms of a bottoming out of asset values and of rents. This is in line with the expected GDP growth of 7-9% in Singapore this year. Colliers expects the recovery in the exports and manufacturing sector to “support an expansion in demand from manufacturers”. This, along with the return of institutional funds, could drive “rents, land and capital values of singleuser factories and warehouses [up] to 10 percent in the next 12 months”. The demand-supply picture varies by asset type, but we do expect a stable-to-positive year for rents and asset values this year, barring significant shifts in the economic environment Big growth plans. Acquisitions are back on the table with transactions worth S$1.25b done in the last seven months; we could potentially see MLT, A-REIT and Cache grow their portfolios further. Balance sheet strength and ability to access capital competitively remains the key sticking point. The subsector has also indicated a new focus on development projects, which has been A-REIT’s domain until now. Asset enhancements and divestments appear to be popular strategies as well.
Valuation. In terms of forward yield, industrial REITs trade at a premium of 100 basis points to the broader sector. Interesting, industrial REITs are actually trading at a lower 5% discount-to-book versus 13% for S-REITs on average. There is significant divergence in valuations within the sub-sector: while A-REIT is trading at a 22% premium to book value, on the other extreme, AAREIT trades at a 32% discount to book. We think this is partially because of continued investor caution towards smaller industrial REITs. Nevertheless, if second-tier industrial REITs can present two to three quarters of sustained earnings performance and deliver on their strategic plans, we could see the valuation gap narrow. We have a NEUTRAL rating on the broader S-REIT sector.
CitySpring – BT
CitySpring back in black with $7.8m profit
Q4 earnings at $1.78m; It declares DPU of 1.05 cents for the quarter
CITYSPRING Infrastructure Trust upped its cash earnings by 7.4 per cent to $23.5 million for its fiscal fourth quarter, lifted by contributions from its Australian asset, Basslink.
The trust said it uses cash earnings as a measure of its performance, since capital-intensive infrastructure assets tend to show accounting losses due to fairly large amount of non-cash depreciation charges.
It declared a distribution per unit for the quarter of 1.05 cents – after factoring in the rights issue that was announced in August 2009 – compared with 1.75 cents in the fourth quarter of last year.
Basslink – an undersea electricity transmission cable in Australia – generated cash earnings of A$10.8 million (S$12.6 million) for the three months ended March 31, 2010, up 83.1 per cent from the same period a year ago.
City Gas Trust’s cash earning contributions dropped 47.5 per cent to $8.5 million over the year.
CitySpring said that such short-term fluctuations in the cash earnings of City Gas Trust was due to a time-lag in the adjustment of gas tariffs to reflect actual fuel cost.
Its third asset, SingSpring, had its desalination plant recording cash earnings of $4.2 million in the fiscal quarter, inching up 5 per cent from a year ago.
For the full-year, CitySpring’s cash earnings dipped 5.1 per cent to $57.9 million.
The trust posted a quarterly net profit of $1.78 million, swinging from a net loss of $399,000 registered a year ago. Quarterly revenue rose 21.3 per cent to $118 million.
Net profit for the full fiscal year stood at $7.86 million, reversing from a net loss of $50.2 million. Revenue slipped 2.7 per cent to $388 million.
The underlying performance of the three assets is expected to remain stable, the trust said in its financial statement on Saturday.
‘Basslink’s telecoms services, which have turned in creditable results since its launch in July 2009, is expected to continue to perform to expectation,’ CitySpring noted.
The anticipated increase in demand for town gas – following the opening of the two casinos and prime shopping malls on Orchard Road – is expected to boost the volume growth of gas for City Gas, it added.