Month: July 2010
StarHill Gbl – Daiwa
Valuation discount persists
Rating maintained
• We maintain our 2 (Outperform) rating and six-month target price of S$0.70, based on parity to our RNG valuation (a finitelife Gordon Growth model. We believe Starhill Global’s discount to the other retail-property S-REITs is unjustified. It is currently trading at sustainable DPU yields of more than 7% based on our FY10-12 forecasts.
Major risk: overcoming its perception problem
• We believe the sponsor, Malaysia’s YTL group (Not rated), has a perception problem. The injection of two Malaysian assets, Starhill Gallery and Lot 10, from the sponsor’s Malaysian REIT at a net-property income yield of 6.8% with a tax-efficient assetbacked securitisation structure, has received, at best, a lukewarm reception from the market so far, in our view. We believe the negative perception does not justify Starhill Global’s valuation discount, although it might take some time for investors to become more comfortable with the sponsor. We believe more clarity on how the assets perform after the acquisition and the leadership of new CEO, Ho Sing, appointed by the sponsor, could go a long way to dispelling the negative perceptions.
Orchard Road supply concern is receding
• We believe the stronger-than-expected absorption of new retail space last year and the modest level of forthcoming supply for the primary shopping area are positive for Starhill Global. As long as Wisma Atria and Ngee Ann City remain relevant (another opportunity for management to prove itself), we expect them to attract their fair share of quality tenants.
StarHill Gbl – OCBC
Compelling investment case; initiate with BUY rating
High quality assets. Starhill Global REIT (Starhill) owns 13 properties across five countries with retail and office components. Starhill derives some 60% of its gross revenue from Singapore, where it holds stakes in Wisma Atria and Ngee Ann City, landmark assets on Orchard Road, Singapore’s premier shopping street. Other assets including the newly acquired Malaysia assets are also in high traffic, central locations, with mid-high end or luxury positioning.
Strong sponsor. Sponsor YTL Corporation Berhad (YTL), one of the largest listed companies on the Bursa Malaysia, holds a 28.8% stake in Starhill. YTL has clearly outlined its vision for Starhill as its main platform for ownership of prime retail and commercial properties in the Asia-Pacific region. The benefit is not just in terms of indirect and/or direct financial support – YTL has strong relationships with major global retailers such as Moet Hennessy Louis Vuitton (LVMH) and the Swatch Group.
Stable income profile with growth potential. Starhill enjoys a number of long-tenure leases and master leases that provide long-term income stability to the REIT along with potential for rental upside. Approximately 42% of Starhill’s revenue is derived from such leases (including the Malaysia assets). While we still see weakness in the local office market (estimated 13% of gross revenue), we believe retail sales will be on an uptrend in most of Starhill’s operating markets as those countries emerge from recession and begin to experience economic growth. We also see scope to grow income through asset enhancement initiatives and acquisitions.
Compelling investment case.Starhill is trading at a 34% discount to its book value (as of 31 Mar 2010). This compares favorably to Singapore-only retail and diversified retail/office REITs and overseas-only retail REITs which are trading at an average 1.0x and 0.8x price-to-book respectively. We believe the significant discount is unjustified when considering Starhill’s high-quality assets, healthy balance sheet and its strong sponsor. We value Starhill using our DDM-based valuation model, assuming a discount rate of 6.7% and a conservative terminal growth rate of 0.5%. This yields a fair value estimate of S$0.65, which is fairly reasonable, in our view, at only 0.79x price-to-book. This also translates to an estimated upside of 19% to the current price and an estimated total return of 26%. We initiate coverage of Starhill with a BUY rating. Key risks to our view include macro-economic headwinds, increasing competition in the retail space, foreign exchange risk and changing regulatory and taxation regimes.
A-REIT – DBSV
Let the numbers do the talking
• Improving leasing demand outlook with rentals inching up in FY1Q11
• Offers FY11-12 DPU growth of c5% p.a. fueled by new asset contributions
• Favorable risk-reward ratio at current levels, Upgrade to BUY, TP maintained at S$2.11
Leasing activities picking up with rentals inching up. We gather that leasing enquires have picked up momentum in recent months with increasing business volumes. As such, the manager has also begun to move asking rents up in discussions with prospective tenants or during renewals. Rentals for business parks space is understood to have inched up 3-5% qoq to cS$3.50-S$4.00 psf per month while rents for Hi-Tech and Logistics warehouses firmed to an average of S$2.60-2.90 and S$1.00-1.40 respectively. This will mean minimized risk of negative rental reversions in FY11-12 given that current transacted rents are above expiring rents for each industrial subsector. As such, we have renewed confidence that A-REIT should be able to deliver sustained earnings in the coming quarter.
Contributions from larger portfolio in FY11. REIT has taken delivery of over S$429m worth of development properties/acquisitions over the course of 2H10, which will start contributing to earnings from 1Q11. As the manager is on the lookout for acquisition & development opportunities to undertake in the coming quarters, we have assumed an additional S$150m worth of new asset acquisitions over the course of FY11 in our forecasts.
Favorable risk-reward ratio, upgrade to BUY. We see value emerging at current levels as the stock now trades at – 1 S.D of its historical yield band of 6% and currently offers FY11-12F DPU yields of 7.4-7.7%, above S-REIT peers average of 6.8%, which we find attractive. With an upside of 13% backed by a further yield of 7.4-7.7%, we upgrade A-REIT to a BUY, TP S$2.11 maintained.
CDL H-Trust – BT
Locked and loaded
• Shoring up balance sheet with S$197m from placement with slight dilution to earnings
• Armed with strong financial muscle to acquire assets with gearing at only 19%
• Maintain BUY, TP adjusted to S$2.03. Additional 18Scts upside to TP assuming S$400m of acquisitions
Shoring up balance sheet. CDL HT recently completed a placement of new shares (116.9m new units, representing 13% of share capital), raking the trust S$197m in net proceeds, which included exercising an upsize option to raise an additional S$50m. These proceeds will be utilized towards paying down current debt obligations, resulting in the trust having a lower gearing ratio of c19%, down from 31% previously.
Minimal adjustment to DPU of up to 6%. Dilution to DPU of c5-6% in FY10-11F to 10.8 Scts and 11.6 Scts, respectively, due to the enlarged share base offset by interest savings from the repayment of its loans (S$116m towards repayment of S$ bridging loan for its Australian acquisition & remaining S$80m for the repayment of its loan facility with DBS Bank).
Low gearing level of 19% opens up acquisition possibilities. With a re-capitalized balance sheet, CDL HT stands strong with the financial muscle to undertake larger acquisition opportunities, estimated up to S$400m, assuming a long term gearing target of c35%. This financial flexibility will come in handy when CDL HT participates in any opportunistic tender sale exercise where the ability to close the deal fast is key.
Maintain BUY, TP adjusted to S$2.03. Our target price is adjusted 7% downwards to S$2.03 to take into account the enlarged share cap. Our numbers do not assume any acquisitions. Assuming acquisitions of S$400m on a gearing of 35% could add a further 18Scts to our target price.
REITs – BT
Mapletree to float after listing 2 Reits
Trusts with combined assets of $5-6b to list by next year and set stage for Mapletree’s own flotation
Mapletree Investments, a fully-owned real estate subsidiary of Temasek Holdings, yesterday announced plans to list two trusts that will hold a total of about $5-6 billion of Singapore assets between them. One of the flotations is targeted by year-end.
In addition, the group plans to set up another three private equity funds over the next 12 months.
Once the two real estate investment trusts (Reits) have been listed on the Singapore bourse, the company’s business profile and performance track record will be strengthened and Mapletree itself could be floated, although this may be two years from now, Mapletree’s group CEO Hiew Yoon Khong said at a media briefing yesterday.
‘If you look at the pure qualification of listing, we can go (for a listing) any time. But when we go to the market, we want the market to be quite clear that we are quite a unique real estate company,’ he added.
‘The IPO will not be driven by the usual fund raising objective but it will help us in terms of improving our footprint, branding and engagement in the market place.’
He also said Mapletree plans to double total assets under management from $12.9 billion currently to $25 billion in five years, with growth driven by third-party assets under management.
The group is targeting to list a Reit by the end of this year that will hold about $2 billion worth of Singapore industrial properties, subject to conducive stock market conditions.
Bankers have already been appointed to work on the IPO; they are believed to include Goldman Sachs, Citigroup and DBS.
The second Reit that Mapletree is working hard to mint will hold about $3-4 billion of Singapore commercial properties – anchored by Vivocity mall, and possibly including Merrill Lynch HarbourFront, PSA Building and Mapletree Business City (MBC).
However, the precise portfolio composition of this second Reit has not been determined as some assets were completed recently and may need more time for their income to stabilise.
Mapletree plans to be able to do an IPO for this commercial Reit, to be called Mapletree Commercial Trust, by year-end, although this may stretch to next year.
The first Reit will hold the former JTC industrial portfolio worth $1.73 billion currently held under Mapletree Industrial Trust (MIT) as well as possibly other Singapore assets held under Mapletree Industrial Fund (MIF), subject to approval of MIF and MIT investors.
The proposed Reit is likely to be geared at 30-35 per cent. Mapletree expects to retain a stake of about 30 per cent in the trust post-flotation, suggesting an IPO size of close to $1 billion, said Mapletree’s CEO (industrial) Phua Kok Kim.
MIT’s portfolio is currently syariah compliant and if Mapletree chooses to have the proposed Reit syariah compliant as well, it will open up a demand pool from Middle East investors, Mapletree executives said.
The three private equity funds which the group hopes to spin off in the next 12 months will include a second China-focused fund to undertake new commercial and residential projects once the existing Mapletree India China Fund is fully committed for its China allocation, says Mapletree Investment’s chief investment officer Chua Tiow Chye.
There are also plans for a Vietnam fund for which Mapletree has already identified a pipeline of commercial and residential projects to seed the proposed fund.
The third new fund will be a Japan-focused one that will invest in the IT-related business space – for which the group bought a light industrial building in Tokyo this year as a seed investment.
Later down the road, Mapletree is also planning a China-focused industrial fund.
Currently the group manages the Mapletree Logistics Trust and co-manages the Lippo-Mapletree Indonesia Retail Trust.
It also manages four private equity funds, including one jointly with CIMB in Malaysia.