Month: August 2010
Cambridge – DBSV
Earnings dilutive acquisitions
• Acquisition of 2 assets worth S$37.1m; part-funded by placement of 83.6m new units
• Lowered earnings by 2-6% in FY10-11F
• Downgrade to HOLD, TP S$0.51.
Looking towards growth. Cambridge REIT acquired 2 industrial properties for S$37.7m, yielding c8.0%. Income from these properties is backed by long-term leases of over 7 years with periodic step-ups. The acquisition is expected to complete in Sept 2010.
Private placement 83.6m new units to raise S$40m gross proceeds; new 3-year debt facility secured. The acquisition will be funded through (i) S$23.7m from private placement proceeds, (ii) S$13m drawn down from its debt facility at estimated c3.05% cost. The remaining placement proceeds of cS$15m will be used for future acquisitions or fund its planned asset enhancement initiatives. Gearing post acquisition is expected to head down to 41.5% from 42.3% as of 30th Jun 2010.
Dilutive to earnings, DPU adjusted downwards by 2-6%. Expect earnings dilution since placement price implies a yield of 10% against the asset yield of c8%. Our DPU estimates are adjusted downwards to 5.0 – 4.8 Scts in FY10-11F, reflecting the transaction.
Downgrade to HOLD, TP adjusted to S$0.51. We are somewhat surprised at management’s decision to acquire assets that are earnings dilutive. We remain on look out for future initiatives (AEI plans) that would grow earnings to offset the dilution. Given limited upside to our TP of S$0.51, we downgrade the stock to HOLD.
CitySpring – DBSV
Another safe quarter
At a Glance
• 1Q11 DPU of 1.05Scts as expected; we maintain our DPU estimate of total 4.2Scts for FY11
• Outage at Basslink hit 1Q11 revenues.
• Cash earnings of S$18m was slightly above our estimates due to strong cash flows from CityGas
• Yield of close to 7% looks secure, maintain BUY with TP of S$0.67
Comment on Results
Outage at Basslink, other operations stable. Group revenue was up 25% y-o-y to S$104m in 1Q11, on the back of higher tariffs at CityGas, but slipped 12% q-o-q owing to an outage at Basslink, which led to lower facility fees. The facility fees can be recovered, however, if Basslink maintains an overall availability of 97% for the full year of CY2010. Basslink revenues were also affected by negative CRSM (risk sharing mechanism) payments to Hydro
Tasmania. As a result, cash earnings declined about 20% q-o-q to S$18m, but this was still slightly above our expectations and represented a sizeable improvement over the levels seen in the first 3 quarters of FY10, owing to the mismatch between CityGas tariffs and fuel oil prices.
Payout ratio leaves room for comfort. The Group paid out 1.05Scts for the quarter, in line with the guidance of 4.2Scts for FY11. Net cash distributed amounted to a conservative 57% of net cash generated in 1Q11, and hence we remain comfortable with our DPU estimates for FY11.
Outlook and Recommendation
Maintain BUY. CitySpring remains as a relatively safe yield instrument. We maintain our BUY call at an unchanged TP of S$0.67. With a gross cash of close to S$100m, risks like higher fuel prices at CityGas and ongoing discussions with Hydro Tasmania regarding a A$6.9m payment are unlikely to affect payouts. M&A remains a possible catalyst given the improved balance sheet following to the rights issue last year.
Cambridge – Phillip
Acquires 2 properties
• Acquires 2 properties for $37.1 million.
• Private placement to raise gross proceeds of $40.0 million
• Maintain hold and fair value of $0.52
Acquisition
Cambridge announced the acquisition of 2 properties at a consideration of $37.1 million. The purchase is at a slight discount to the appraised value of $37.2 million. The property located at 22 Chin Bee Drive has a lease term of 7 years and the initial yield is 9.0%, and there is a rent escalation component of 5% on the 3rd, 5th and 7th year. The property located at 1&2 Changi North St 2 has a lease term of 7 years with an option to renew of another 7 years and the initial yield is 8.01% with annual rent escalation of 1.5%. The total acquisition cost is approximately $37.7 million and will be partly funded with $24.7 million from the private placement proceeds and the remaining $13 million through debt.
Private placement
The private placement consists of 83,683,000 new units which will be placed out to two groups of investor. The first group consists of institutional and other investors and the new units are priced at an issue price $0.478. The second group consists of the Oxley Group and Mitsui & Co Ltd and the new units are prices at $0.503. The private placement is fully underwritten and will raise gross proceeds of $40.0 million and net proceeds of $37.6 million. Part of the net proceeds is used to fund the acquisition while the remaining proceeds will be used for future acquisitions.
Gearing
Gearing is expected to reduce from 42.3% to 41.5% post the acquisition. The REIT will also be repaying $32 million of the existing loan from the divestment proceeds and gearing is expected to further reduce to 39.5%. In relation to the acquisition, Cambridge has secured a $50 million term loan facility and a $20 million revolving credit facility on a 3 year tenor. The term loan facility has an all-in 3.05% interest cost and $13 million will be drawn down to part finance the acquisition.
Advance distribution
Due to the issuance of new units, Cambridge will pay out advance distribution to existing unitholders prior to the issuance of the new units. Management guided the advance payout to be between 0.6 to 0.7 cents. We estimate this to be 0.674 cents and 3Q10 DPU inclusive of the advance distribution to be 1.169 cents.
PLife – Lim and Tan
Range Of Possibilities
• Remarks by Malvinder Singh of Fortis in a BT interview on plans in Singapore, after the acceptance of Khazanah‘s offer for Parkway Holdings, are worth noting, specifically: “it makes sense to look at a reit in healthcare …. we have the largest pathology and diagnostics business in Asia outside Japan, a private company in India which we could bring in here”.
COMMENTS
1. PLife is the only “pure” healthcare reit in Singapore, or indeed in Asia-x-Japan.
2. Trying to establish and list a new reit here, made up of Indian assets, or for that matter anywhere outside of Singapore, is unlikely to “succeed” – just look at IndiaBulls (and other Indian listings here), or for that matter First Reit, comprising 4 Indon healthcare-related assets and 4 in Singapore. These have gone nowhere since listing.
3. PLife is 8 cents off its peak of $1.50 reached on Aug 2nd.
4. Malvinder’s plans aside (possibilities include buying over Parkway’s stake in PLife, currently 35.77%), Khazanah’s possible moves after the close of its offer for Parkway (such as selling Pantai hospitals to Plife) will likely sustain interest in PLife.
5. Offering 5.9% yield based on annualized DPU for Q2 (2.09 cents), PLife still looks attractive. We maintain BUY.
PLife – Phillip
2QFY10 Results
• 2QFY10 revenue of $18.7 million, net property income of $17.3 million, distributable income of $12.6 million.
• 2QFY10 DPU of 2.09 cents
• Maintain Buy, fair value of $1.66
Parkway Life REIT (Plife) registered 2QFY10 revenue of $18.7 million (+16.4% y-y, +0.5% qq), net property income of $17.3 million (+15.6% y-y, +0.6% q-q) and distributable income of $12.6 million (+10.9% y-y, +1.0% q-q). DPU for the quarter was 2.09 cents (+10.6% y-y, +1.0% q-q). The improved y-y performance is attributed to the contribution from acquisitions as well as the annual rent revision of the Singapore properties. For the annual Singapore properties rent revision, Plife announced that it will be revised up by 1.73% beginning 23rd August for the next one year. This is based on the CPI+1% formula which guarantees a minimum rent increase every year. Plife has been active on the acquisition trail, having made 14 purchases in the last year. It acquired eight nursing homes in November 2009 and another six nursing homes in June 2010. Post 2Q10, it made another purchase of 5 nursing homes which will contribute to 3Q10 revenue.
Since IPO, all of Plife’s acquisitions are in Japan and the portfolio now consists of 3 properties in Singapore and 29 properties in Japan. We view the Japan acquisitions positively given the high yield, low funding cost, which adds to the stability of the REIT. With a sizeable asset value of $400 million in Japan, we believe Plife will start consolidating its Japan properties and shift its expansion focus to other areas. Gearing of the REIT post the July acquisitions is 34.4% with total debt of approximately $460 million.
2Q10 results came in within our expectations. We are expecting revenue growth in 3Q10 to come from the revised Singapore annual rent as well as the contribution from the June and July acquisitions. We adjusted our FY10E DPU forecast up slightly from 8.4 cents to 8.6 cents to factor in the 20% of management fees paid in units versus our previous assumption of 100% cash. We still like Plife for the stability of its revenue stream. We maintain our Buy recommendation and fair value of $1.66.