Month: April 2012
Shipping – BT
Fewer box ships lying idle but supply set to increase
Overcapacity still not addressed by owners, operators
The inactive containership fleet has fallen for the first time since August 2011, driven by carriers which are readying themselves for the busy peak summer months ahead.
However, optimists who think it may signal the turning of a tide towards a better match between supply of ships and demand for cargo – and therefore herding shipping lines back to profitability – think again.
On the one hand, data from Alphaliner shows that the idle boxship fleet as of Mar 26 declined about 75,000 twenty-foot equivalent units (TEUs) over two weeks. The mothballed fleet of container vessels now stands at 5.3 per cent of global capacity or 838,000 TEUs, down from 5.8 per cent or 913,000 TEUs.
The reductions have all come from container lines putting back their idled ships into service to handle more cargo demand in the summer, whereas non-operator owned idle ships have stagnated at 397,000 TEUs.
Notably, carriers have decided to yank larger vessels out of lay-up. The number of idled vessels capable of carrying 7,500 TEUs or more have dropped to 12 units from 18.
‘Freight rates are about demand and supply. Re-introducing idle capacity will increase the supply which weakens the utilization. This will affect the rates negatively,’ said Jason Chiang, senior manager at Drewry Maritime (Asia).
Moreover, Drewry Maritime Research said that idled container tonnage remains relatively low and the overcapacity situation is still underaddressed by ship owners and operators today.
During the throes of the global financial crisis in 2009, about 12 per cent of the global box ship fleet were made inactive.
‘Until the inherent structural capacity is truly tackled, we will continue to have periodic and violent bouts of overcapacity that will keep rates and operating margins yo-yoing up and down,’ said Neil Dekker, head of Drewry’s container research.
There is a lot more room yet for more lay-ups.
In 2012, 59 ‘large’ container vessels of over 10,000 TEUs capacity will be entering the global fleet. It is almost for sure they will be deployed on the already overcrowded Asia-Europe long-haul trades, which Credit Suisse estimates to have about 330,000 TEUs worth of capacity a week.
Said Mr Chiang: ‘The liners’ hands may be forced to their last option of idling. Another 7.4 per cent of supply will be added to the system, the simple answer is that a similar amount of existing capacity should be idled to allow for the introduction of new capacity.’
A-REIT – OCBC
STILL IN THE PINK OF HEALTH
•Completes purchase of Cintech properties
•Leverage around 36% post acquisition
•Positive rental revisions in the cards
Completion of acquisition of Cintech properties
Following the announcement on 6 Feb to acquire three properties at Science Park Drive from sponsor Ascendas Land, Ascendas REIT (AREIT) reported that the transaction was completed on 29 Mar at a total consideration cost of S$185.5m. No consideration units were issued as Ascendas Land had indicated that it did not wish to receive any equity consideration. This is contrary to A-REIT’s initial intention to fulfill the acquisition by making partial payment via unit issuance amounting to not more than 50% of the purchase price. As a result, the purchase consideration was fully paid in cash by way of internal resources and drawdown of debt. This should raise A-REIT’s aggregate leverage from 34.3% as at 31 Dec 2011 to ~38%, according to management. However, following the recent revaluation gains of S$260.5m (+4.5%) over the prior valuation for its portfolio properties, we estimate that its leverage may be lowered closer to 36%.
Portfolio performance remains resilient
In the same announcement, A-REIT updated that its Singapore properties continued to achieve positive rental reversions of 2.6-12.5% YTD upon renewal of its existing leases. Moreover, the passing rents for all the leases in its multi-tenanted buildings, with expiry dates over multiple years, are still some 13-28% below the prevailing market spot rental rates. This is in line with our view that A-REIT’s operating performance is likely to stay resilient in the coming quarters. As a note, property consultant DTZ Research is expecting industrial rents to fall by 5-10% in 2012. This is still higher than AREIT’s passing rents, even if industrial rents correct to the higher end of the estimates.
Maintain BUY
We now factor in the acquisition of Cintech properties and portfolio revaluation into our forecasts. We also re-jig our DDM model assumptions (cost of equity at 7.5%, up from 7.0% previously) and roll over our valuation to FY13. This raises our fair value marginally from S$2.30 to S$2.31. Maintain BUY.
PCRT – Kim Eng
Proxy for China’s retail spend
Pure-play China retail development business trust. Listed in June last year, Perennial China Retail Trust (PCRT) is Singapore’s first pureplay China retail development business trust. This means that there is no restriction on the number of development assets PCRT can hold, unlike a REIT. Gearing also is not capped, although management has a self-imposed limit of 60%.
Well-located properties. PCRT’s portfolio includes three properties in Shenyang and two suburban malls in Foshan and Chengdu that are still under construction. In addition, the business trust has the options and right of first refusal to prime commercial development sites directly connected to the high-speed rail (HSR) stations in Chengdu, Xi’an and Changsha. It recently obtained unitholders’ approval to acquire a 50% stake in Chengdu Longemont Mall, which will have a GFA of 455,260 sqm, to be built beside Chengdu’s HSR station.
Initial portfolio to be fully operational by 2014. PCRT’s initial portfolio comprises its 50% stakes in Shenyang Red Star Macalline Furniture Mall, Shenyang Longemont Shopping Mall, Shenyang Longemont Offices, Foshan Yicui Shijia Shopping Mall and Chengdu Qingyang Guanghua Shopping Mall. Currently, only the first two properties are in operation, but PCRT expects all the properties to be completed and income-producing by 2Q14. Even Chengdu Longemont Mall is expected to be completed by 3Q14.
Proven management record. PCRT’s sponsor is Perennial Real Estate Pte Ltd, helmed by Mr Pua Seck Guan. With over 20 years of real estate experience, Mr Pua was instrumental in Singapore’s first REIT listing of CapitaMall Trust and was CEO of CapitaLand Retail Limited (which later became CapitaMalls Asia). During his time at CapitaLand, Mr Pua was involved in the acquisition, development and management of 70 malls across China.
Ride the upside. PCRT unitholders can look forward to NAV growth as its properties get completed and stabilised, given the attractive acquisition costs which are on a completed basis. When China’s capital markets mature, there may be avenues to realise the enhanced value. In the meantime, unitholders are likely to be rewarded with a DPU of 3.86 cents for FY12F, translating to an attractive yield of 7.4%.
ART – OCBC
COMPELLING RISK-REWARD – UPGRADE TO BUY
•LT downside for European assets capped
•Diversified portfolio to buffer risks
•Attractive yield and undemanding PB
Re-evaluating ART’s risk-reward proposition.
As European concerns reach an interlude after the recent Greek bailout, we re-evaluate ART’s risk-reward proposition by conducting a bottom-up analysis of its asset exposure. Currently, 40% of ART’s assets fall in Europe, spilt mostly between France (21%) and the UK (15%). In our view, while French and UK GDP growth are likely curtailed over FY12-13, we now see lower odds of long-term economic fractures given limited data-points pointing to a catastrophic fall-out to date.
LT downside for French and UK assets likely limited.
We note four of ART’s 17 properties in France (half of total French asset value) are situated in core Paris and are unlikely to face significant long-term capital-value downside due to their prime quality and locations. Moreover, ART’s French portfolio is wholly run under master leases with limited near-term income downside. Similarly, all four of ART’s UK properties are in prime London regions near under management contracts with minimum guaranteed income clauses.
Diversified asset exposure by geography and contract types.
ART’s remaining 60% asset exposure outside of Europe is mostly diversified in Asia between developed economies (Singapore 22%, Japan 14%) and developing economies (22%). Going forward, we expect that ART’s well diversified asset portfolio, both in terms of geography and management contracts types, would help buffer it against region-specific or short-term financial shocks.
Upgrade to BUY – attractive yield and margin of safety.
At this juncture, we judge that ART shares are attractive given a robust yield of 7.9% which should underpin the share price, and an undemanding P/B ratio of 0.8x which provides a reasonable margin of safety for bear case fair-value write-downs. Re-financing risks are also fairly limited with ART’s relatively healthy gearing of 41% and a maturity profile that is well-spread out. We update our model and upgrade to BUY with an increased S$1.12 fair value estimate (versus S$0.98 previously) mostly due to lower capitalization rates for European assets.