Month: July 2011
CitySpring – Kim Eng
Staying one step ahead
Event
• CitySpring Infrastructure has proposed a renounceable 11‐for‐20 rights issue at $0.39 per rights unit to raise $205m in net proceeds. The proceeds will be used to fund a partial buyback of the A$486m floating rate bonds ahead of their maturity in August 2015. Taking into account the interest savings from debt reduction and the enlarged base of 1,519m units, we lower our target price from $0.540 to $0.46. Maintain HOLD.
Our View
• The proposed capital injection is a preemptive move intended to deflect the effect of a negative outlook on Basslink bonds’ rating and to ensure that Basslink’s distributions to CitySpring will not be disrupted in the event of a rating downgrade.
• Even though the use of the rights proceeds to partially buy back the A$ bonds will result in net interest savings of about $8.5m, the capital raising exercise is still viewed as a negative on the whole as there is no financing of any yield‐accretive acquisition.
• Temasek Holdings, the sponsor, has committed to subscribe for up to 85% of the rights units. If it were allotted the entire undertaking, the Singapore investment company will hold 48% of all units following the rights issue. However, the rights units are not subject to any lock‐up agreement that precludes their subsequent disposal by Temasek.
Action & Recommendation
Assuming that the amount distributed to unitholders in FY Mar12 is kept at around the same level as in FY Mar11, we estimate full‐year DPU to be 3.3 cents in view of the enlarged unit base. While the dividend yield is still attractive, there does not seem to be any major driver for a re‐rating. Management is seeking organic growth in distributions to unitholders through the gas network conversion project for City Gas. However, the project’s timeline has yet to be determined. Maintain HOLD with a target price of $0.46.
MIT – CIMB
Positive accretion but at high cost
Wins Tranche 2 of JTC second divestment
MINT has been awarded Tranche 2 of JTC’s second-phase divestment portfolio of S$400.3m, a shade below the appointed valuers’ S$402.7m valuation but 46% above the second bid by AREIT. With an implied entry yield of 5%, we believe the bid was aggressive. Management, however, highlighted the stronger reversionary growth potential for this acquired tranche vs. its existing portfolio, with rentals estimated at more than 30% below JTC’s newly-posted rents. Part of the acquired portfolio is also located near its existing assets within the Kallang Basin, providing opportunities for operational and leasing efficiencies. Management is reviewing financing options. No change to our DPU estimates pending details on financing. We continue to like MINT for its organic growth potential and maintain our earnings estimates as well as DDMbased target price of S$1.27 (discount rate 8.4%). Catalysts could include higher-thanexpected rental reversions.
The news
MINT has been awarded Tranche 2 of JTC’s second-phase portfolio divestment of S$400.3m, a shade below the appointed valuers’ valuation of S$402.7m. This implies a valuation of S$145 psf GFA and S$189 psf NLA. With a total GFA of 256,251sq m and NLA of 196,898 sq m, the portfolio comprises eight flatted factories and three amenity centres across five property clusters within established industrial estates in the central and eastern regions of Singapore. Contrary to our expectations, renewal rates will still be subject to a rental escalation cap of 5% per annum on JTC’s latest posted rents (1 Jul 11) for three years from the completion date (estimated Aug 11), mirroring MINT’s existing portfolio of flatted factories. Management is still reviewing its financing options.
Comments
Entry yield of 5%. Management estimates overall rentals for the acquired portfolio at more than 30% below JTC’s latest posted rents of about S$1.53 psf for the clusters near the acquired tranche. Coming in 46% above the second highest bid by AREIT (AREIT was likely less keen on this portfolio) and implying an entry yield of only 5% (vs. its current portfolio’s 7%), we believe the bid was aggressive, notwithstanding the growth potential.
Strong potential. Management, however, sees stronger rental reversion for this acquired tranche vs. its existing portfolio, due to an under-rented portfolio and the ability to benefit from JTC’s newly posted rents in Jul 11. Kallang Basins 1, 2 and 3 clusters would also complement its nearby assets in Kallang Basins 4, 5 and 6, which should afford some operational and leasing efficiencies and cost savings. Management also notes a more centralised location for these newly acquired assets and opportunities for asset enhancement which could further propel rental growth.
Funding likely through debt and equity. Management is reviewing its financing options and will be releasing more details after its 1Q12 results on 26 Jul. With limited debt headroom of S$373m to a 45% gearing, we expect the acquisition to be funded by a mix of debt and equity. Assuming 50:50 debt-equity, we expect moderate DPU accretion of about 1% for FY13 when full-year contributions kick in. We set out below the DPU accretion expected in FY13 on different assumed debt-equity funding and placement prices.
Valuation and recommendation
Maintain Outperform. We keep our DPU estimates pending details on the funding mix. Assuming 50:50 debt-equity, we expect moderate DPU accretion of 1% for FY13 when full-year contributions kick in. We continue to like MINT for its organic growth potential and expect catalysts from higher-than-expected rental reversions.
MIT – BT
Mapletree Industrial Trust, Soilbuild win JTC properties
They bagged over 300,000 sq m of industrial space for $688.6m
MAPLETREE Industrial Trust (MIT) and Soilbuild Group have secured over 300,000 square metres worth of industrial space from JTC Corporation at a combined price of $688.6 million, JTC said yesterday.
MIT took up the more expensive tranche – which consisted of 11 blocks of flatted factories and amenity centres – which was sold by JTC at $400.3 million.
The other tranche – comprising 10 blocks of flatted factories and amenity centres – was sold to Soilbuild for $288.3 million.
The factories are located mainly in places such as Kolam Ayer, Kallang Basin, Tai Seng, Bedok and Kampong Ubi.
This is the second divestment of industrial properties by JTC.
The first was finalised in 2008 when JTC sold 39 high-rise ready-built factories worth a total of $1.7 billion to Temasek Holdings’ unit Mapletree Investments.
According to an earlier BT report, at least five parties had submitted bids in the first phase of the two-stage tender process that closed in early March.
The contenders could bid for either or both tranches of assets and had to state their indicative bid prices for the respective tranche of assets, as well as listing their track record, financial strength and proposed business plans for the properties, among other things.
The three parties were then shortlisted and invited to perform due diligence on the assets in the tranche or tranches they were eyeing.
The same report cited analysts saying that the bid price is likely to be the main factor that JTC will use in deciding whom to award the two tranches of properties to under the second stage of the tender process.
This is because it would have factored in the qualitative factors in shortlisting the bidders under stage one.
Shares of MIT gained one cent to close at $1.18 yesterday. Soilbuild was privatised last year.
CitySpring – Lim and Tan
• The proposed 11-for-20 rights issue at 39 cents each should be welcomed by investors, even though there could be some disappointment it is not to be privatized :
a. it removes a major overhang which has been bothering investors since the downgrade warning by S&P last November;
b. without this capital raising, CitySpring would be in no position to maintain its distribution, which has been kept at 4.2 cents a unit (or 3.28 cents on pro-forma basis);
c. management has given an undertaking there will not be need to raise further equity down the road (except in the event of CitySpring making yield accretive acquisitions);
d. Temasek, which owns 27.8%, has undertaken to take up to 85% of the new units, with the remaining 15% to be underwritten by DBS, Goldman Sachs.;
e. the $204.8 mln net proceeds will be used to reduce high-cost borrowings; and perhaps more importantly,
f. it better places CitySpring to “pursue organic and inorganic acquisitions and investment opportunities”.
• The subscription price represents a 19% discount to the theoretical ex-rights price of 48.35 cents (53.5×20+39×11/31).
• Temasek has obtained whitewash waiver in the event it ends up having to take up 85% of the rights units, which would raise its stake to 48.1%, and which would have triggered a mandatory general offer.
• We are maintaining BUY on 6.8% pro-forma yield now that major uncertainties have been removed.
FCOT – CIMB
Near-term catalysts in sight
• Near-term catalysts from early refinancing; initiate with Outperform. FCOT is a commercial REIT investing primarily in offices in the region. We use DDM (discount rate 9.4%) to value FCOT at S$0.99. Since taking over in 2008, FCOT’s management has stabilised its capital structure and assets and divested non-core holdings. With a stabilised portfolio and capital structure and a strong sponsor in F&N, we see no reason for its depressed 40% discount to book and forward yields of 7-8%. We see catalysts from early re-financing and improvements in occupancy and rentals.
• DPU upside just from refinancing. FCOT’s entire debt will be maturing in 2012. With a high cost of debt of 4.3% vs. 3% for most REITs in their recent refinancing, we anticipate an 11% DPU uplift even with a minimal rate reduction of 50bp.
• Further kicker from expiry of master lease. The master lease for its largest local asset, China Square Central (net rents of S$4+ psf), will be expiring in 2012. With significant leases due for expiry in 2012 and F&N’s expertise in retail management, direct management of the asset could allow FCOT to ride the rental upside. Possible AEI and hotel development to unlock value could also be low hanging fruits for FCOT.
• We do not see an overhang from CPPUs, with limited dilution of 4% on full conversion. Redemption of the CPPUs at par could even allow accretion if overall funding costs for FCOT come in below the CPPU rate of 5.5%.
Valuation and recommendation
DDM-derived valuation. We use DDM to value FCOT, the methodology we use to value all the REITs under our coverage. We use a discount rate of 9.4%, derived from a risk-free rate of 3.8%, an equity risk premium of 4.3% and a beta of 1.3x. We also assume a terminal growth rate of 2%.
Initiate coverage with Outperform and target price of S$0.99. We initiate coverage with a target price of S$0.99, which represents a total return of 30% from a forward yield of 7% and price upside of 23%. Since taking over the reins in 2008, FCOT’s management has stabilised FCOT’s capital structure and assets and divested noncore holdings. With a stable portfolio and capital structure and a strong sponsor in F&N, we see no reason for its depressed 40% discount to book and forward yields of 7.1% (vs. office S-REITs’ averages of 0.8x P/BV and 6.1% DPU yield). We do not see an overhang from CPPUs (with limited dilution on full conversion) and even anticipate accretion from potential redemption at par on favourable funding rates. We thus initiate with an Outperform, anticipating catalysts from early re-financing at favourable costs of borrowing and improvements in occupancy and rentals.