Month: October 2012
Fortune – OCBC
FURTHER YIELD COMPRESSION COULD TAKE PLACE
- Aug retail sales slightly better than Jul
- Landlords have more bargaining power
- Raise FV to HK$6.49; Upgrade to BUY
Aug sales show slight improvement over Jul
In Aug, the value of HK retail sales climbed 4.5% YoY, a slightly improvement over Jul, which saw sales rise 3.9% YoY (revised figure). We note that these increases are substantially lower than the YoY increases earlier in the year, which ranged between 8.7% and 17.1% for Jan-Jun. However, despite the recent lackluster growth, we believe that landlords have reasonably good bargaining power.
What retailers are thinking…
According to a recent press release by the Hong Kong Retail Management Association, for full year 2012, most sub-sectors sectors expect single-digit to double-digit growth. Given the uncertain economy and high rental and labor costs, the majority of subsectors will consider more automated store operations to reduce manpower costs. Apart from closely monitoring stock control, should inflation continue, they may increase prices. They may also reduce the rate of store expansion and close shops if rental costs are too high. We interpret that rental rates may have more room to climb vis-à-vis the cost of other production factors, specifically wages and inventory costs.
Rental rates keep climbing
In Jul, the HK retail rental index climbed by 2.3% MoM and 14.3% YoY. The HK retail price index climbed by 2.7% MoM and 29.2% YoY. In comparison, for Jun 2012, the nominal wage index for those in the import/export, wholesale and retail trades increased by only 4.3% YoY. Given that FRT’s malls are geared more towards non-discretionary spending, they should have a stronger footing versus high-end malls.
Upgrade to BUY
We lower our discount rate on the premise that interest rates will stay low till at least mid-2015 given QE3. We raise our fair value from HK$5.33 to HK$6.49 and upgrade FRT from Hold to BUY. On a historical basis, the FY12F dividend yield of 5.4% is not low relative to the HK retail market yield of ~2.7% (YTD, based on government’s provisional figures). This suggests further yield compression could take place.
CCT – OCBC
REFINANCED CONVERTIBLE BONDS DUE 2013
- Refinanced 2013 CB
- Rental declines to slow in 3Q12
- Higher FV of S$1.62
Refinanced convertible bonds due 2013
CCT recently announced that it had refinanced the outstanding balance of its convertible bonds due 2013 with a new S$175m CB issue due 2017. The new 2017 CB has a yield to maturity of 2.5% (versus 3.95% for the 2013 CB), and would yield net proceeds of S$171.9m, of which S$141.1m would be paid for the 2013 bonds (total of S$126m face value) priced at 111.30 and S$20.75m for the settlement of a clean-up call at 109.37 expected on 15 Oct 2012.
CapitaGreen and 6BR AEI progressing as planned
We note that construction works for CapitaGreen is progressing well, with construction status currently at 26% (foundation piling) and main works staying on schedule for completion in 4Q14. The S$92m AEI at Six Battery Road is also on schedule; 200k sq ft of space was targeted for upgrading in FY12, of which 49% was completed in the first half of the year.
Office rentals decline likely to slow in 3Q12
We believe that Grade A office rentals are likely to show a more subdued dip in 3Q12 after three consecutive quarters of declines since 3Q11. Over 2Q12, Grade A office rentals fell 4.7% QoQ to S$10.10 which cumulated in an 8.7% decline over three quarters. Core CBD vacancies, however, showed a reversal from a rising trend in 2Q12 to register a 0.9 ppt dip to 8.4%. A similar picture was seen for islandwide vacancy rates which declined 0.9 ppt to 6.4% (end 2Q12) from 7.3% (end 1Q12). We expect a similar trend for vacancies in 3Q12 which would likely contribute to a muted rate of rental decline.
Maintain BUY
We like that CCT continues to comfortably manage its debt expiry schedule and maintains steady access to capital markets at relatively attractive rates. Maintain BUY with a higher fair value estimate of S$1.62 (versus S$1.53 previously), as we incorporate firmer cap rates assumptions to reflect more benign expectations for the office sector.
HPH-Trust – Kim Eng
The Port of Choice for Your Portfolio
Sustainable yield of 9%; initiate with BUY. Hutchison Port Holdings Trust (HPHT) is a business trust holding container port assets in Hong Kong and Yantian, providing stevedorage and other port services to global shipping lines. We initiate coverage of HPHT with a DDM-derived target price of USD0.925 and a BUY recommendation. A sustainable distribution yield of 8.4-9.1% p.a. is far too attractive to ignore, especially given HPHT’s earnings resilience and capacity for further growth.
Resilient throughput growth. While HPHT’s portfolio ports have shown strong historical throughput CAGR of ~10% p.a. from 1993 to 2011, it also demonstrates resilience in times of global crises. Volume declines in crisis-hit 2008 and 2009 were marginal, at -1% and -4% YoY. Following the crisis, volumes in 2010-11 rebounded to an average CAGR of 10%, more than making up for the volume declines of the two prior years. We think HPHT remains well poised for a recovery based on recent stimulus measures from the EU and US Fed.
Looking favourably upon this fallen angel. HPHT’s share price has been depressed since its IPO at USD1.01 in Mar 2011, declining ~26% to date. A mispriced IPO and, more recently, concerns about economic growth in China and HK, were said to have been contributing factors. However, we think that current pricing levels, which imply yields of 8.4-9.1%, are attractive vis-à-vis its regional peers, REITs and other
business trusts, adding to its compelling investment case.
Underappreciated by the market: BUY. HPHT remains one of the largest holders of container port assets made available to investors who have an interest in dividend yield plays. Its current depressed price provides a rare opportunity to own a resilient business which would also be a beneficiary of a global economic recovery. Initiate coverage with BUY. Our target price of USD0.925 provides 24% upside in addition to stable dividend yields of 8.4 – 9.1% p.a.
MLT – OCBC
STRONG SHOWING TO CONTINUE
- Increasing exposure in South Korea
- Positive on FY13 results
- Expecting 5.5% growth in DPU
Completion of acquisition of warehouse
Mapletree Logistics Trust (MLT) announced last week that it has completed the acquisition of Hyundai Logistics Centre in Gyeonggi-do, South Korea for KRW22.5b (~S$24.7m). The date of completion was ahead of our projection as MLT had previously guided that the transaction was targeted to complete by 3QFY13 (Dec quarter). Hence, the property will contribute two quarters to MLT’s FY13 income, as opposed to just a quarter in our estimate. As a recap, the property comprises two blocks of three-storey dry warehouses and has a total GFA of 32,300 sqm. The investment is expected to be DPU-accretive, with initial NPI yield of 9.0%. After factoring in the acquisition and divestment of 30 Woodlands Loop in Singapore, we note that the revenue contribution from South Korea is expected to rise from 7.0% to 7.7%.
Steady performance in FY13
For FY13, we remain confident of MLT’s financial performance. While management expects business sentiments to stay cautious in light of the slowing growth in Asia and concerns over the Eurozone crisis, we expect MLT to continue to benefit from its recent acquisitions and enhanced operational metrics. We also believe that positive rental reversions from its portfolio are still on the cards, albeit possibly lower than the average growth rate of 10% seen in 1QFY13. In addition, only 12.7% of its leases by NLA are due for renewal in FY13, of which ~42% has been successfully renewed/ replaced. Hence, we are positive of MLT’s results in the coming quarters.
Retain BUY rating
We are making minor adjustments to our FY13 forecasts to incorporate an earlier rental contribution from Hyundai Logistics Centre. Our FY13F revenue and DPU now stand at S$317.1m and 7.06 S cents, translating to a respectable growth of 14.3% and 5.5% respectively. There is no change to our fair value of S$1.19. Maintain BUY.
Sabana – Phillip
Company Overview
Sabana REIT is a Singapore-based REIT with a mandate to invest in income-producing industrial real estate and real estate-related assets in Singapore and Asia with compliance to Shari’ah investment principles.
- Factored in the yield-accretive acquisition of 23 Serangoon North Avenue 5
- Maintain accumulate with revised target price of $1.07
What is the news?
Sabana REIT had concluded the acquisition of 23 Serangoon North Avenue 5 at S$61.0mn. The purchase was partially funded from the S$80.0mn Convertible Sukuk at a rate of 4.5%. Besides that, the additional Murabaha
facilities of $258.6mn were refinanced in August at a lower interest rate of 4.1% relative to the existing all-in cost of 4.4%.
How do we view this?
By factoring the new purchase and interest cost-savings to our model, we raise our price target from S$1.04 to S$1.07. Post acquisition, the gearing ratio is expected to hit c.37.6% based on the earlier announcement and this translates to c.S$25.9mn of debt headroom. With the first Convertible Sukuk successfully taken up by institutional investors, we reckon it will pave the path for future debt financing other than conventional loans. Although Convertible Sukuk is a cheaper alternative compared to equity fund raising, we do not rule out Sabana REIT to do a private placement or rights issuance given sizeable property acquisitions going forward.
Investment Actions?
We maintain our assumption of having the payout ratio at 94.0% from 2013-2016 and expect occupancy to fall at the end of 2013 as the head tenants may choose not to renew the contracts when the bulk of the master leases expired. Hence, FY13 DPU will slide down first before reversing. If the payout ratio is taken out from our assumption, our price target could have jumped to S$1.13. Upside risks may come in the form of potential positive rental reversion from the properties that are expiring in 2013 and revaluation surplus of its portfolio for FY12.
Despite the price has performed exceptionally well and exceeded out price target, the high forward yield of 7.6% is likely to remain compelling among the S-REITs universe given the current yield-starved period. The yield spread against 10yr bond yield is around 6.2% and thus Sabana REIT’s trading yield may be compressed further as being one of the high-yielding securities with stable and sustainable income stream. Maintain Accumulate.