Month: July 2010
PST – DBSV
DPU stable; first look at future growth
At a Glance
• PST’s 2Q10 results and distribution of 0.793UScts per unit in line with our expectations
• Existing cash flows look stable, management refocuses on growth plans with diversification into dry bulk sector
• Trading at about 11% FY10 yield, maintain our BUY call at TP of US$0.37 (9% target yield)
Comment on Results
DPU of 0.793UScts was declared for the quarter, which is similar to the 1Q10 payout. 2Q10 revenue of US$15.1m was steady on a sequential basis, and net profit held steady at US$6.6m. After regular loan amortisation of US$4.3m, net cash generated for 2Q10 amounted to US$6.5m – of which approximately US$4.7m will be distributed to unitholders and the remaining US$1.8m retained for future working capital purposes. This implies a payout ratio of about 72%, in line with existing conservative payout policy.
Outlook & Recommendation
As announced earlier, PST plans to acquire two new capesize bulk carriers for a consideration of US$61.6m each, for delivery in September 2011. The vessels come with a 10 -year long-term charter with Jiangsu Shangang Group of China, China’s largest private steel maker and we believe, a reputable counterparty. The 2 vessels represent about 28% of current book value and is PST’s first diversification away from the container sector. While the initial 15% deposit can be paid from existing cash reserves, the remaining 85% will have to be financed by a combination of debt and equity. Given the Trust is only likely to obtain 60% Loan-to-Value financing at best, that leaves a shortfall of around US$25-30m, which we believe could require another round of equity infusion next year.
Given that the new ships will be delivered in end-3Q of FY11, and financing will only be required around that point, we do not foresee any impact to FY10 DPU estimates. However, depending on the timing of equity issue and pricing, FY11 DPU may face some dilution. We are currently looking at about 5-7% DPU accretion in FY12, based on our assumptions. Maintain BUY and TP of US$0.37.
CMT – Kim Eng
Sowing the seeds for organic growth
Event
• CapitaMall Trust (CMT) announced a 2Q10 DPU of 2.29 cts, resulting in a 1H10 DPU of 4.52 cts, in line with expectations. CMT’s net property income for FY10 improved by 5.5% yoy to $196.4m, mainly due to decreased operating expenses. CMT will also be considering development projects for selective participation. Maintain BUY.
Our View
• CMT continued to deliver a steady set of results, with 1H10 distributable income growing by 13.5% to $153.7m. It also enjoyed positive rental reversion, with new rents or new leases being signed at 6.3% higher than the preceding rates on average.
• Despite the opening of new malls, CMT’s portfolio occupancy rate remained at a robust 99.5%. AEI works at Raffles City and the redevelopment of JCube are now underway. CAPEX requirements for JCube’s redevelopment have been revised down by $35.3m to $165m due to savings in construction cost. CMT also aims to undertake AEI for The Atrium@Orchard from 1Q11 to 3Q12, which would lift CMT’s DPU from FY12 onwards.
• CMT has no immediate refinancing needs in the next 12 months. Management is open to selective participation in Greenfield development projects. This was demonstrated by its joint bid with its sponsor, CapitaMalls Asia, for the recent tender of a White Site at Jurong Gateway Road, which narrowly came in second. Based on the Property Fund Guidelines, CMT could undertake development projects valued at about $780m (or 10% of its deposited assets).
Action & Recommendation
The recently acquired Clarke Quay will start contributing in 2H10 and the rest of the portfolio should continue its consistent performance. Maintain BUY with a DDM‐derived target price of $2.23.
Suntec – DMG
Prime office rents could be rising at a faster pace
2Q10 results within expectations. Suntec reported 2Q10 DPU of 2.53¢ (-15.1% YoY; +0.6% QoQ), representing 26% of our FY10 DPU forecast of 9.57¢. Despite an improvement in office occupancy, net property income fell 2.8% on the back of negative rental reversion. Suntec will trade ex-2Q10 distribution on 30 July 2010. We raise our DDM-based TP to S$1.71 (from S$1.56) based on higher terminal growth assumption. Suntec trades at an attractive FY10 yield of 6.6%. Maintain BUY.
Suntec retail occupancy rose marginally. Suntec REIT’s portfolio office occupancy rose to 97.6% from 96.9% in 1Q10. Both Park Mall and One Raffles Quay remain 100% occupied while Suntec City office registered a 1.1ppt QoQ improvement in occupancy to 96.6%. Similarly, Suntec’s retail occupancy saw an occupancy improvement of 1.5ppt to 98.7%, due largely to the 1.9ppt rise in Suntec City mall’s occupancy, which now stands at 98.3%.
Small office floor plate tenants paying S$8/sqft. In the analyst briefing, management mentioned that lease renewals for tenants with small floor plate requirements recently paid S$8/sqft at Suntec City office, while larger ones went at the top end of the S$7-8/sqft range. This is in contrast with CBRE’s 2Q10 reported prime rents of S$6.90/sqft. While management did not disclose the number of such deals that were signed, we are upbeat that this signals a strong inflection of office rents within the sector.
Raise TP to S$1.71 on higher terminal growth assumptions. Judging from the dynamics of the current economic growth momentum, it could take anywhere between 12-18 months for excess office supply to be absorbed, thereby resulting in a tight market by early 2012. Rental growth prospects are likely to be robust once excess capacity is absorbed. Our new TP of S$1.71 assumes a terminal growth assumption of 4% (3.3% previously). Stock trades at 5.6% yield at our TP, a reasonable peg in our view.
CMT – CIMB
Steady performer
• In line; maintain Neutral and target price of S$1.93. 2Q10 results met Street and our expectations. 2Q10 DPU of 2.29cts (+7.5% yoy) forms 25% of our full-year estimate of 9.1cts. 1H10 of 4.52cts (+10.2%) was also in line, at 50% of our FY10 forecast. We reduce our capex assumptions for JCube by S$35m according to management guidance on lower construction costs. Our DPU estimates increase by less than 1% for FY10-11 but there is no material change to our DDM-based target price (discount rate 8.1%) of S$1.93. Although we anticipate positive retail sales in 2H10 in view of mega-events such as the Youth Olympic Games and F1, there remains moderate downside risks from: 1) more than 700,000sf of NLA due for expiry in 2H10; 2) increased opex costs; 3) stiffer competition for CMT’s properties located in the central areas from newer malls; and 4) more than S$1bn of debt refinancing in FY11. Re-rating catalysts for the stock could include successful renewals with positive rental upside, in our view.
• 2Q10 net property income of S$98.8m (+5.3% yoy) was up on higher renewal rates and lower property expenses from lower property taxes, and maintenance and marketing expenses. Rental reversions grew 2% p.a. in 1H10, an improvement over the 0.5% p.a. growth in 1H09, mirroring positive retail sales.
• Portfolio occupancy as at 30 Jun 10 was 99.5%, a dip from 99.8% as at 31 Dec 09. The biggest decline came from IMM, down from 99.7% in Dec 09 to 97.9% in Jun 10 (-1.8% pts) due to the non-renewal of a junior anchor. Management remains confident of securing replacement tenants, as it did for other properties. For instance, Barang Barang departed from Plaza Singapura last quarter, but its space was shortly taken by Daiso’s new F&B concept with some rental upside.
• Asset enhancement initiatives (AEI) for JCube (previously known as Jurong Entertainment Centre) and Atrium@Orchard will be its priority in the short term. Updates include a reduction of capex by S$35m for JCube from lower construction costs and the commencement of Atrium@Orchard AEI in 1Q11, targeted for completion in 3Q12.
ART – OCBC
2Q10 in line; diversification creates both risks and Opportunities
2Q results in line. Ascott Residence Trust (ART) posted S$44.4m in 2Q revenue, up 3.4% YoY and 2.2% QoQ. Overall RevPAU for the quarter was S$125 compared to S$119 in 2Q09 (+5%) and S$120 in 1Q10 (+4.2%). Distributable amount for 2Q was S$11.6m, up 5% YoY and 12.4% QoQ, as payout in 1Q10 was hit by one-off variances in the tax line. This is equivalent to 1.87 S cents DPU, 3.3% above our estimate of 1.81 S cents. Revenue and gross profit were within 3% of our estimates. For the half-year, ART will pay out a total 3.53 S cents, or an annualized yield of 5.7%.
Asset works and acquisitions. Refurbishment of the two Singapore properties has been completed (the timing of the works was accelerated in response to the strong recovery in the local market). ART has now started refurbishment works on selected properties in Vietnam and China. It continues to explore asset divestments and acquisitions. ART is currently leveraged at 40.7% debt-to-assets, and is comfortable going up to 45% debt-to-assets. The manager noted that any acquisition would be financed using a combination of debt and equity; its target markets include Vietnam, India, Singapore and second-tier cities in China. The manager is also open to exploring any opportunities outside the Pan-Asian region created by the sovereign debt crisis in Europe.
Diversification creates both risks and opportunities. Performance continues to be mixed geographically – markets like Singapore and China are performing strongly but the Philippines and Vietnam recorded RevPAU declines on both a QoQ and YoY basis. ART re-iterated its 1Q10 guidance: the pace of recovery of hospitality demand “differs in [its operating] markets”, providing “income stability”. Right now, the stronger markets are propelling ART forwards: for 2H10, we are estimating a payout of 3.97 S cents (+12.5% HoH). This is driven both by seasonality effects and improving performance in Singapore post-asset works. For FY10 as a whole, we expect YoY DPU growth of 2.5% to 7.5 S cents. Nevertheless, a key risk to our investment thesis is that macroeconomic / regional economy risk tilts the balance between ART’s stronger and weaker markets, impacting DPU growth. This is likely to prove to be a near-to-medium term issue: ART noted it “remains confident of the long term growth in its operating markets.”
Valuations compel us to maintain our BUY rating and S$1.32 fair value [unchanged, 12.5% estimated total return].