PCRT – CIMB

Looking past the rough patch

The recent sell-down has lifted dividend yields to attractive levels of 8-10% till 2014. We believe negatives have been priced in. While teething difficulties are here to stay, near-term weakness is mitigated by growth opportunities on the back of a more robust trust structure.

Long term prospects remain attractive when revaluation gains kick in to boost NAV growth. We maintain Outperform on an unchanged target price (still at 35% discount to RNAV). Strategic monetisation of assets and stronger-than-expected leasing progress are potential catalysts.

Attractive dividend yields

While we remain watchful of operational difficulties on the ground, strong dividend yields buffer weaker earnings as malls go through the gestation phase. Negotiated earn-out structures are sufficient to guarantee a minimum of 8-10% dividend yields till 2014, providing 1-3 years of buffer time for malls to stabilise. Factoring in more conservative rental growth estimates, we anticipate a decent portfolio yield-on-cost 0f >6% when earn-out structure tapers off. We look forward to the 2014/15 turnaround, with strong NAV growth when revaluation gains kick in, and self-sustaining dividend yields of approx. 6% on cash-generative assets.

Robust trust structure: better equipped for growth

Despite the Apr 2012 sell-down of shareholdings by key local partner, we see Mr. Kuok’s buy-in as reducing over-reliance on any single partner, and establishing greater certainty of a pipeline of retail assets for PCRT via: (1) establishment of joint-investment vehicle (Mr. Pua/Mr. Kuok) with target capital of S$500m, providing additional firepower to PCRT’s sponsor; and (2) alignment of interest between sponsor and business trust with the increase in Mr. Kuok’s shareholding in PCRT from 5% to 16.9% (deemed interest).

Potential monetisation; compelling valuations

Management has indicated the possibility of monetisation of assets, at the right price. With retail assets in Tier 2 cities transacted at Rmb20,000-30,000psm in 2011, we see potential RNAV uplift from strategic divestments. With the stock trading at 0.7x P/BV (CRCT: 1x P/BV) and 50% discount to RNAV, we see value at the current share price of S$0.45 vs. Mr. Kuok’s Apr 2012 off-market purchase price of S$0.446 per unit.