Month: October 2012
Keppel REIT – CIMB
Bright spots but upside limited
3Q12 provided a positive read-through of a stable office market. Yields are compelling but we see this as compensatory for the high asset leverage and limited accretion expected from the acquisition of MBFC Phase 2 (given the likely need for equity fund raising).
3Q/9M12 DPUs were broadly in-line with our and consensus estimates at 26/77% of our FY12 estimates. We tweak DPUs on adjustments to income support and withholding tax. Our DDM-target price is however higher due to a lower discount rate of 7.7% (prev. 8.2%). Maintain Neutral.
Leasing continues
3Q12 distributable profit was up 93.6% due mainly to acquisitions. Qoq, DPU was up a marginal 1% on improved NPI and tax-transparency from MBFC Phase 1. Results provided a positive read-through of a stable office market: Take-ups remain positive, lifting portfolio occupancy to 98.2% from 97.0%, mainly from OFC (95.0% from 92.3%), Prudential Tower (100% from 99.5%) and 77 King Street (97.4% from 92.7%). Signing rents remained fairly stable at S$8-9psf at Prudential Tower and S$12-13psf at Ocean Financial Tower, with no additional incentives offered. Leasing interest for the latter came from a mix of fund management and new-to-market legal firms.
High asset leverage
Aggregate leverage at 44% is the highest in the sector, even without factoring in its recent Australia purchase. While this is expected to be less of a concern now that capital values remain buoyed by low interest rates, higher asset leverage could still warrant equity fund-raising needs for the remaining tranches of its Aussie purchase and a potential acquisition of MBFC Phase 2. Notwithstanding, we understand that KREIT has yet to indicate its interest for the asset.
Maintain Neutral
Forward yields are compelling but we see this as compensatory for its higher asset leverage. This should warrant equity fund-raising needs for further purchases, which could in turn limit accretion. Maintain Neutral on limited upside.
CRCT – OCBC
CHINA RETAIL IS GROWING ALRIGHT
- Beijing can absorb more retail space
- Overall retail sales growth
- Support for continued rental hikes
Room for more retail space
According to Cushman & Wakefield, among major Chinese cities, Beijing has the most retail space on a per capita basis. However, even with the projected growth from ~0.57 sqm to ~0.73 sqm over 2010-2013, Beijing’s retail space per capita will still be half that of HK’s, which is at 1.4 sqm. As explored in our report dated 28 Jun, we believe that CRCT’s malls in Beijing, where four of its nine malls are located, have good locations and will do well despite the overall growth in retail space supply.
Golden Week numbers
The Mid-Autumn Festival (30 Sep) this year coincided with the seven day Golden Week holiday (1 Oct-7 Oct) to give an eight-day break. It has been reported that overall retail sales in China grew 15% to reach RMB800.6b during the National Day holiday. In comparison, overall retail sales grew by 17.5% YoY during the seven-day Golden Week last year. The 15% YoY growth rate this year may have been distorted slightly upwards by the longer holiday period.
Reconciling media news with sales growth
Recent news reports regarding increased inventory pile-ups for certain retailers have caused some people to doubt official retail sales figures, e.g. official figures show that China’s retail sales rose 13.2% YoY in Aug. To get a better picture, we compared 36 consumer companies’ revenue growth for 1HCY12. We have organized nine subsectors by order of descending growth: Alcoholic beverages (+25%), Department stores (+22%), Snack foods and beverages (+17%), TCM (+16%), Supermarkets (+11%), Dairy products (+9%), Fashion and apparel (+8%), Eateries (+6%), Home appliances (+3%). On an average basis, we estimate that retail sales grew by 13% YoY in 1HCY12. More companies (8) reported YoY shrinkage of revenue in 1HCY12 versus the two previous periods, 2HCY11 (3) and 1HCY11 (2). Essentially, while more companies are facing revenue contractions, revenues are climbing overall. Companies should be able to support continued rental increases.
Maintain BUY
We maintain our BUY rating on CRCT and our fair value of S$1.70.
LMIR – OCBC
ACQUIRING FOUR PROPERTIES
- First two in Palembang
- Rental guarantee for one mall
- Maintain FV of S$0.45
Proposed acquisitions
Yesterday, LMIRT announced the proposed acquisitions of four properties from non-interested parties. The first property is Palembang Square, which is currently undergoing AEI that will increase its NLA by ~30%. The second property is Palembang Square Extension, a new one-level underground retail mall which opened in 2Q12. It is directly connected with the first property. These properties, which would be LMIRT’s first in Palembang, South Sumatra, are part of a mixed-use development that also consists of a hotel and a proposed hospital. The third and fourth properties are Tamini Square and Kramat Jati Indah Plaza (KJI), which are located in East Jakarta. All four properties are to be purchased at a discount to book value. Including the aggregate purchase consideration of ~S$180.7m and the acquisition fee payable to the manager, as well as professional fees and other expenses, the total acquisition cost is expected to be S$188.1m.
Rental guarantee for KJI
As at Jun 2012, the occupancy rate at KJI was ~51%. Management indicates that as of Aug the AEI at KJI has been completed and as of the beginning of Sep, the occupancy rate, included committed tenancy agreements, was in the high 70s in percentage terms. As the mall is stabilising, the KJI vendor will provide a rental guarantee of ~S$1.4m per quarter for FY2013 and FY2014.
Updating our model
As to be expected, management is proposing to finance the acquisitions from the proceeds raised from the issuance of S$250m worth of notes in early Jul. Post-acquisition, the aggregate leverage will be ~22%. We assume that the proposed acquisitions will be completed on 1 Nov 2012. We also assume that additional acquisitions totaling ~S$60m closing on 1 Apr 2013 will take place to use up the remainder raised under the issuance of S$250m of notes (blended interest cost of ~5.1%).
Maintain HOLD
We maintain our fair value of S$0.45 and our HOLD rating.
FCOT – OCBC
STRONG VALUE PROPOSITION
- Likely redemption of CPPUs
- Expecting uplift in income
- Fair value estimate raised
Completion of sale of KeyPoint
Frasers Commercial Trust (FCOT) announced on 28 Sep that it had completed the sale of KeyPoint to Bayfront Ventures Pte Ltd for S$360.0m. With the divestment, FCOT is likely to sit on a hefty net proceeds of S$357.8m (after professional and related expenses relating to the sale) and book in a gain of S$72.8m. We are maintaining our view that FCOT will likely use the bulk of the sale proceeds to redeem half of its Series A Convertible Perpetual Preferred Units (CPPUs) and reduce its existing debt liabilities. This is because the funding costs (distribution rate) of the CPPUs and its gearing ratio are relatively high at 5.5% and 39.5% respectively. Based on our understanding, the CPPUs are only redeemable on the first business day of each calendar quarter. Hence, the earliest period FCOT will be able to make the redemption and relieve the drag on its distributable income is in the Dec quarter.
Expecting enhanced performance
Going forward, we are staying positive on FCOT’s financial performance. Apart from a positive impact from the likely redemption of the CPPUs, FCOT is also expected to gain from interest savings as a result of the early refinancing of its S$500m term loan facility at favourable borrowing margins. In addition, the acquisition of the balance 50% interest in Caroline Chisholm Centre and direct tenant leases at China Square Central (CCC) earlier this year are likely to contribute positively to its rental income. Hence, we expect FCOT to meet our FY12-13 forecasts comfortably.
Maintain BUY
We continue to like FCOT for its growth potential, strong execution and attractive P/B of 0.87x. We are holding our FY12-13 forecasts intact as the recent developments are in line with our expectations. However, as we roll our valuations to FY13, our fair value is now raised from S$1.23 to S$1.31. Maintain BUY.
Suntec – Kim Eng
The Sun shines brighter here
DPU top-up unlikely in 3Q12. As a result of Phase 1 AEI work, which started in Jun 2012, we expect revenue from Suntec Mall to slide from SGD103m in FY11 to SGD86m (16% decline) in FY12F. Occupancy rate is likely to fall to 75-78% by year-end (excluding the space vacated by Carrefour). Carrefour takes up some 137k sq ft of NLA and will likely depress occupancy rate to ~60% when its lease tenure expires 31 Dec 2012. Nonetheless, we are confident that Suntec REIT should be able to pay out DPU of at least 2.15 Singapore cents for 3Q12 and at least 9.0 Singapore cents for the full year. We also do not think that Suntec will use its Chijmes divestment proceeds to top up its 3Q12 DPU. It may want to keep this flexibility for 4Q12 when there is greater clarity on its full-year distributable income.
AEI making good progress. From our observation, refurbishment works have been progressing well, with Suntec Convention and the Galleria/Fountain Terrace zones proceeding full steam ahead. Food Republic has ceased operations and tenants at Fountain Food Terrace are expected to vacate by end Oct. We think pre-commitments for Phase 1 leases should hit at least 65% presently and Phase 2 AEI should commence on time by Apr-May 2013. We estimate that the largest dip in mall occupancy should occur in FY13F at ~59%, but this will improve in FY14F to ~70%.
Office portfolio in good shape. Against a background of office supply glut (Pipeline supply of 24% of available Downtown Core stock by 2012-2016) and high vacancy rates (Downtown Core vacancy at 13% in 2Q12), we are heartened that Suntec has secured 100% occupancy for Suntec Office, Park Mall Office, One Raffles Quay and 99.5% for MBFC1. With less than 22% of office leases NLA expiring per annum for the next three years, we remain positive that Suntec’s proactive leasing management will tread cautiously to optimise its office portfolio.
Upgrade to BUY on brighter prospects. There are only a handful of S-REITs that offer yields of more than 6% but are trading at discounts to book. Suntec is one of them, with a yield-spread of 463bps compared to the sector average of 436bps. With all its assets and income contribution from Singapore, we believe investors will continue to favour Suntec in the absence of forex risk (all SGD), highly-liquid S-REIT counters (ADTV >USD8m) and investable alternatives. In addition, in this inflationary and yield-chasing climate, yields for Suntec could be compressed further to 5.5% in our view. Upgrade to BUY with a higher target price of SGD1.66.