Month: June 2012
HPH-Trust – DBSV
Sustainable yield story
• Container throughput growth at Trust’s ports running in line with expectations so far in 2012
• We do not foresee another global credit crunch scenario, nor any resultant sharp negative trade growth as implied by current share price levels
• Maintain BUY for >9% yield; TP US$0.85
Asia-US trades help prop up Yantian volumes YTD in 2012. Continuing with the trend seen in April, Yantian Port operating data for May was again encouraging, with volumes growing 5.1% y-o-y. YTD volume growth at Yantian Port now stands at 2.1%, and is trending in line with our estimates even before the traditional peak season has started. We think export bookings to the US are still holding up, though the European market remains weak and could weaken further.
Slow growth in volumes a reality but a repeat of 2009 – negative trade volume growth – is unlikely. According to our economists, the prospect of a Greek exit from the Eurozone does not have to be another “Lehman moment” for Europe or the rest of the world. The key driver for sharp decline in container trades in 2009 was the credit crunch, which rendered trade financing very difficult. The risk of a credit crunch remains lower this time than in 2008-09, as liquidity is abundant in Asia and markets have had 2 years to think about the current situation and prepare for it. Also, in 2008, the crisis was about dollars, this time it’s mainly the euro, which is not as important to Asia’s trade financing as the dollar.
FY12-13 DPU should still be sustainable even in bear-case scenarios. Under our base case scenario, we expect the Trust to meet its DPU guidance of 6.6UScts for FY12, after taking into account some degree of capex deferral. We also devise 2 sets of pessimistic scenarios, as shown on inside pages, but according to our calculations, unless tariff rates are affected materially, DPU for FY12/13 will still be above the (annualised) FY11 DPU of 6.0UScts. But despite these largely secure cash flows, the Trust is trading in excess of 9% yield, which makes it one of our top large cap high yield picks in Singapore.
CMT – OCBC
EXECUTION REMAINS SPOT ON
•Refinancing going smoothly
•Hougang Plaza sale to strengthen balance sheet
•Bugis+ enhancement completing Jul 12
Refinancing – so far so good
CapitaMall Trust (CMT) recently announced that it would issue HKD1.15b 3.76% Fixed Rate Notes due 2022 under its USD2.0b Euro-Medium Term Note Program. The proceeds would be swapped into SGD190.1m at a fixed 3.45% rate and used to partially refinance the S$783m secured term loan maturing in Oct 2012. We note that CMT’s refinancing is going smoothly with interest costs mostly in line with its current average of 3.3% (end 1Q12), which would consolidate its balance sheet position and lengthen the average term to maturity of its debt structure.
Hougang Plaza divestment further consolidates balance sheet
CMT also recently completed the sale of Hougang Plaza for S$119.1m, resulting in a divestment gain of S$83.8m. Proceeds would likely be used to repay debt and fund potential acquisitions. In our view, with S$1.2b of cash already on its balance sheet and its share price trading at a relatively tight yield of 5.6%, we think CMT’s deployment of the sales proceeds could potentially shed further light on the odds of making a bid for its parent’s stake in the ION ahead.
Bugis+ on track to complete enhancement works
Bugis+ remains on track to complete AEI works by Jul 2012 and its major anchor tenant, Uniqlo, recently began operations. We believe that over 90% of tenants, including Sephora and Aeropostale, would begin sales over the next few months. The yield on cost (including AEI) for Bugis+ is estimated at ~5.8%, in line with that of Bugis Junction, and is significantly improved from the 3.8% passing yield seen when Bugis+ was first acquired as Illuma.
Maintain BUY at fair value estimate of S$2.02
We continue to like CMT’s significant exposure to sub-urban retail rentals, which was relatively resilient during the last downturn. Note that, despite seeing gross turnover fall as much as 21% in some trade categories over FY09, rental reversions remained positive at 2.3% across the portfolio with occupancy rates close to 100%. Maintain BUY with a fair value estimate of S$2.02.
Suntec – DMG
Saving on taxes
Suntec REIT (SUN) recently announced the successful conversion of BFC Development Pte. Ltd. (BFCD) – a company which holds Marina Bay Financial Centre Towers 1 & 2 and the Marina Bay Link Mall, from a private limited company to a limited liability partnership with the name “BFC Development LLP”. SUN currently holds one-third interest in the MBFC properties through its interest in one-third of the issued share capital of BFCD. Following the conversion, although SUN’s interest will remain unchanged, going forward we expect the trust to save an estimated annualized tax of S$3.2-3.7m, as BFCD will no longer be subjected to corporate income tax. We expect this savings in taxes to contribute an additional 0.14S¢ and 0.18S¢ to FY12 and FY13 DPU respectively. Based on our DDM valuation (COE: 9.5%; TGR:1.5%) we maintain BUY on this counter with a revised TP of S$1.52. SUN is currently trading at 6.0% spread to 10-year bond yield which is 108bps and 366bps above its long term (5.0%) and pre-crisis mean spread (2.4%) respectively, our TP of S$1.52 translates to a spread of 5.1% and a potential upside of 13.8%.
Enjoy tax savings by converting to limited liability partnership. By converting to a limited liability partnership (LLP), unitholders of SUN will be able to enjoy tax transparency on the income it receives from the MBFC properties. This is consistent with the tax-free income from other properties held directly by most REITs in Singapore.
Possible conversion of ORQ into LLP in the future. Given the success of converting BFCD into a LLP, we believe SUN and its partners in One Raffles Quay (ORQ) will move forward to convert their holding company into another LLP. However, as the conversions of private limited companies into LLPs are subjected to the approval of IRAS on a case by case basis, we currently do not forecast this factor into our model. Additionally, even if the conversion is successful, we expect to see minimal impact on the earnings of FY12.
Office REITs – DBSV
A long-term savings plan
• Operational income from MBFC Phase 1 becomes tax transparent Under LLP structure
• Conversion for One Raffles Quay to this more tax efficient structure possible in the longer term
• Upgrade K-Reit to BUY (TP S$1.21), maintain BUY for Suntec Reit (TP S$1.58)
A more tax-efficient structure for MBFC Phase 1 in place. K-Reit and Suntec Reit had announced that they have successfully converted the vehicle which holds Marina Bay Financial Centre Towers 1 & 2 and Marina Bay Link Mall Phase I (collectively known as MBFC Phase I), into a Limited Liability Partnership (BFCD LLP) structure. Under the previous structure, both K-Reit and Suntec Reit pay a17% corporate tax rate on the rental income generated on the property. Upon conversion, the operational rental income (excluding income support) generated by MBFC Phase 1 will no longer be subjected to corporate taxes. The new structure will take effect from 16 June 2012 and is not retrospective.
FY13 DPU to increase by 3.6% – 5.1%. Based on our estimates, both Reits should reap tax savings of close to S$2.2 m and S$4.5m in FY12 and FY13 respectively. Netting off administration fees, we estimate that FY12 DPU should increase by 1-2% and FY13 DPU by about c4-5%. We think this conversion is a positive step as it would also pave the way for the possible restructuring of One Raffles Quay’s (ORQ) into a similar more tax efficient LLP structure in the longer term Currently, the payable tax for ORQ is estimated to be close to S$3m p.a.
TP rise by 7.9% – 8.6%, upgrade K-Reit to BUY.
Adjusting for the tax savings, Suntec Reit’s TP is raised by 8.6% to S$1.58. We continue to like Suntec Reit for its strong balance sheet and we believe the tax savings should help to partially offset the income vacuum of Suntec City Phase 1 AEI works which began 2Q12. We have also upgraded K-Reit to BUY from HOLD. We like K-Reit’s for its quality assets and we believe the tax savings would help to strengthen its balance sheet. Net of the tax adjustment and factoring in a higher withholding tax for its Australian property, our new TP of S$1.21 (+7.9%) offers investors a total return of c.30%.
Suntec – OCBC
HIGHER DPU FROM TAX TRANSPARENCY STATUS
•Conversion of BFC Development Pte Ltd
•Income from LLP tax transparent
•Unitholders to enjoy higher DPU
MBFC properties holding company obtains LLP status
Suntec REIT announced last Friday that BFC Development Pte Ltd (BFCD PL), which owns MBFC Properties, had been successfully converted from a private limited company to a limited liability partnership with the name BFC Development LLP (BFCD LLP). Suntec REIT had held one-third interest in BFCD PL. Following the conversion, the REIT now holds one-third interest in BFCD LLP as a partner.
Positive impact from the conversion
As a limited liability partnership is tax transparent for Singapore tax purposes, this means that Suntec REIT will enjoy tax transparency on its share of income from MBFC Properties going forward (adjustments are not retrospective). This is positive for unitholders as the distributable income is likely to be higher now that the income generated will no longer be subject to corporate tax. We understand that dividend income (cash flow) and share of profits will benefit from the conversion, whereas income tax for income support will still be ongoing. Based on our estimates, FY12-13F DPU may get a boost of 0.11-0.17 S cents, or 1.2-1.9% increase. This, together with the GST refund from income support expected in the coming quarters, will likely cushion a temporary dip in DPU from the asset enhancement works at Suntec City, which began at the start of Jun.
Maintain HOLD on valuation grounds
We factor in the DPU uplift from higher contribution from MBFC Properties. This in turn raises our DDM-based fair value to S$1.23 from S$1.20 previously. We note that Suntec REIT’s unit price has outshone both the STI (+6.7%) and S-REIT Index (+12.7%) with a 23.3% gain YTD as a result of better-than-expected financial performance and excellent execution by management. At current level, however, we believe that Suntec REIT is fairly priced on a total return basis. As such, we retain our HOLD rating.