Month: June 2010
KGT – DBSV
Green is the colour of Cash
• "Green" assets with steady long term cash flow
• Zero debt balance sheet will enable growth
• However, growth pipeline is limited at this point
• Projected DPU yield of 6.9% not far from peers; initiate coverage with HOLD and TP of S$1.20
Stable, long-term cash flows. The initial portfolio of KGreen Trust ("KGT") consists of two Waste-to-Energy (incineration) plants as well as a water recycling (NEWater) plant in Singapore, with concession terms ranging from 15-25 years. The net cash flow generated will mostly comprise availability payments i.e. the fixed part of total payments, which will be paid as long as the contracted treatment capacity is made available, irrespective of actual volume treated. Counterparty risk is also minimal as off-takers are Singapore Government entities. Management has projected a DPU of 3.91Scts for the 6 months of FY10 and 7.82Scts for FY11, implying an yield of close to 7% at listing price.
Zero debt balance sheet could support inorganic growth. While the potential for organic growth is limited, the Trust does have the balance sheet flexibility to pursue inorganic growth, as it is debt-free at the time of listing. The Sponsor has provided a pipeline of 4 assets as part of Rights of First Refusal ("ROFR") deed, but these assets will need to be warehoused by the Sponsor until they are operationally stable, and the smaller size of the ROFR portfolio means that even injection of the whole portfolio would only potentially enhance FY11 DPU by less than 5%.
HOLD, for now. Given its debt-free balance sheet and steadier non-cyclical cash flows than some peers, we expect KGT could trade at a slight premium to other infrastructure business trusts. Given the historical trading ranges of peers, we believe KGT could trade between 6-8% target yield, which would imply a share price range of S$0.98 – S$1.30. Our valuation, based on a slight premium to peers (6.5% target yield) is S$1.20. Initiate with HOLD, catalysts could come from a larger and more visible acquisition pipeline.
CDL H-Trust – DMG
Cash call necessary for probable acquisitions
Cash call exercise to beef up balance sheet. CDLHT announced the issue of 84.8m – 87.7m new units at between S$1.71-1.77 per unit to raise gross proceeds of S$150m, subject to an upsize option to raise additional proceeds of up to S$50m. The issue price represents a discount of between 6.3-9.4% to VWAP of S$1.88 and an increase in share capital of about 10%. According to management, the rationale for this private placement is aimed at providing CDLHT greater debt headroom and financial capacity on potential acquisitions. Maintain BUY, DDM-based TP of S$2.30.
Mild DPU dilution of 3.8% with equity placement. Approximately S$116m will be used to repay its SGD portion of the bridging facility (~5% interest cost) which was used to finance the 5 hotels in Australia, and between S$31-80m to repay part of a DBS loan facility. With a cost of equity of ~6%, we estimate the placement to dilute CDLHT’s FY10 DPU by 3.8%. Nevertheless, the cash call will strengthen its balance sheet, bringing its gearing from 30.9% to 22.6%; amongst the lowest compared to other S-REITs. Large cap peers such as AREIT, CCT, CMT and Suntec have gearings of between 30-33%.
Acquisitions within 6-12 months. Management is seeking to undertake another acquisition within the next few months. They have confirmed their interest in Ibis Bencoolen hotel, which has been put up for sale via a private tender. The 538-room hotel could fetch about S$200m at about 6% yield. Based on a gearing target of 30-35%, CDLHT has a debt headroom of between S$200-350m; sufficient to finance an acquisition of such scale.
Maintain BUY; our S-REIT top pick. We reduce of FY10 DPU estimate from 11.6¢ to 11.1¢ but maintain our TP of S$2.30, in view that strategic acquisitions will likely boost longer-term DPU growth potential. We expect Singapore to register its record 1m visitors in July – a banner figure for the media; hence creating significant euphoria within the sector and engendering a further re-rating for CDLHT.
CDL H-Trust – Phillip
• Price fixed at $1.71, private placement of 116,960,000 new stapled securities
• Net proceeds approximately $196.4 million
• Maintain Hold, fair value at $1.92
One day after CDL HT announced the proposed private placement, it followed up with another announcement that book building for the private placement is closed and is oversubscribed. The issue price is fixed at $1.71, the lower end of the proposed price range and with the upsized option exercised, 116,960,000 new stapled securities will be issued. Trading is expected to commence on 1 July 2010.
The strong take-up indicates that there is strong interest in the stock among the placees. However share price fell 6.3% from its previous close of $1.89 to close at $1.77 yesterday. This is more than the ‘TERP’ we estimated at $1.86. We gather that existing shareholders were not too happy being left out of the placement exercise. Nevertheless, the balance sheet now looks stronger and more ready to act on any acquisition opportunities. Furthermore, we
are still a firm believer in the Singapore tourism sector and that CDL HT stands to benefit from the strong rebound in the sector.
We adjusted our forecasts to account for the dilution and the interest savings. These reduce our DPS forecasts for FY10E-FY12E by 6.5%-7.7%. We reduce our fair value from $1.96 to $1.92 and maintain our hold recommendation.
CitySpring – OCBC
Updates on Basslink
New CEO at Hydro Tasmania. Effective 21 Jun, state-owned Hydro Tasmania has appointed Mr Roy Adair as its new CEO. Hydro Tasmania is CitySpring Infrastructure Trust (CitySpring)’s counterparty on the 25-year revenue agreement for the Basslink asset. Mr Adair was formerly the President and CEO of Singapore’s Senoko Power (previously owned by Temasek) for six years. With Mr Adair’s experience working with Temasek, we believe CitySpring’s relationship with Hydro Tasmania should remain intact under the new regime.
Inquiry into Hydro Tasmania. The Tasmanian state government has launched an independent inquiry into the operations of state-owned energy companies Hydro Tasmania, Transend and Aurora Energy. Apart from its relationship with Hydro Tasmania, Basslink also has an agreement with Aurora relating to its new telecoms business. A deal to increase Aurora’s profits, which is believed to be having some financial difficulties, by intervening in the regulation of power prices was apparently conditional on the establishment of this inquiry. The independent panel will investigate issues including the effectiveness of current regulation; the causes behind increases in power prices; and the impact of major infrastructure development issues. It will also give advice on the formation of a new energy strategy for the state.
Manager sees limited impact on Basslink. A major threat to infrastructure investments is the risk of expropriation or creeping expropriation, where the government squeezes a project by taxes, regulation, access, or changes in law. The local community’s perception and acceptance of the project and its owners (particularly overseas owners) – is another key risk. We met up with CitySpring’s manager this week, who does not expect any impact to its contractual relationship with Hydro Tasmania, especially in light of Basslink’s strategic importance to the state. We do note that discussions are still ongoing with Hydro Tasmania on its demand for an additional A$6.9m in Commercial Risk Sharing Mechanism payments from Basslink for CY2009.
City Gas negotiations continue. We have previously highlighted the ongoing discussions with Singapore’s Energy Market Authority (EMA) regarding the conversion, and ensuing liberalization, of the City Gas town gas network (refer to our 25 May report for more details). The manager told us it was re-assured by the consistent and fair nature of EMA’s decisions so far as a regulator. Still, we believe the uncertain outcome (whether positive or negative) merits a higher risk premium in the absence of greater information. Maintain HOLD rating and our DDM-derived S$0.60 fair value [7.2% discount rate, 0% terminal growth].
LMIR – OCBC
Macro signals continue to show strength
Indonesian economy sees growth. Indonesia’s Deputy Finance Minister said this week1 that the economy is likely to have grown by 5.9% YoY in 2Q10. The Central Statistics Agency reported that Indonesia’s GDP grew 5.7% YoY in 1Q10. Domestic consumption accounts for about two-thirds of the Indonesian economy. The Indonesian government has forecast growth of 5.8% in 2010. It also expects growth of 6.1% to 6.4% next year. Earlier this month, Indonesia’s Finance Minister Agus Martowardojo said that he expected economic growth to be underpinned by “household consumption that stays strong, the improving investment climate and the increase in export activities”. We note inflation hit 4.16% in May – its highest level in a year; the IMF noted that monetary policy may need to be adjusted later in 2010 “if inflationary pressures increase” .
Leasing efforts positive. In our view, strong domestic consumption could lift the fortunes of both retailers and retail landlords like LMIR Trust (LMIR). At 1Q10 results, LMIR had reported that retail mall occupancy as of 31 Mar fell 2.2 percentage points compared to three months ago to 93.8%. The manager attributed the occupancy decline mainly to the expiry of rental guarantees, granted by the vendor at the time of LMIR’s IPO, on spaces that had undergone extensive asset enhancement. After including temporary leasing and new leases committed by way of signed letters of intent, occupancy at Mar 2010 was 96% (flat). We spoke to the manager this week and understand that leasing efforts are going well, and occupancy trends are positive. LMIR also reports continued growth of customer average spend per visit. This is supported by other accounts of increasing consumer confidence and consumption – PT Astra International said it expects vehicle sales of 650,000 units in 2010, up 34% YoY.
Valuation. The manager noted at 1Q10 results that the REIT’s “portfolio has a very defensive position with very low upcoming expiries and already high occupancy levels”, which may cap near-term earnings upside from the improving retail environment. Nevertheless, LMIR still has scope for accretion from new acquisitions, thanks to its low leverage of 10.2% debt-to-assets (the lowest in the S-REIT sector). Meanwhile, CFO Shane Hagan tendered his resignation this month, after just a year with LMIR. We don’t expect a significant impact to the REIT, with LMIR’s CEO assuming Mr Hagan’s duties until a replacement is found. Our fair value estimate of S$0.55, at a 20% discount to SOTP value, remains unchanged. With a 23.7% estimated total return, maintain BUY.