Month: March 2013
PLife – OSK-DMG
Offers steady DPU growth
We recently hosted PREIT at our Singapore REIT Conference. Key takeaways are: (1) ceteris paribus, DPU would continue to rise, due to its lease structures that have downside protection; (2) PREIT will continue to look for acquisitions in the region, with more focus on Japan; (3) balance sheet remains healthy, with gearing at 33%. We continue to like PREIT for its stable DPU growth and defensive nature. However, we think its prospects and resilience has been priced in. Maintain NEUTRAL with TP of SGD2.46.
Lease structure has revenue downside protection. Currently, 90% of PREIT’s leases have downward protection – leases are either pegged to CPI (with a min. 1% growth in rental) or have upward rental revision only. The remaining 10% is open to negotiation at prevailing market rate. With such a feature, revenue is likely to continue growing, which would translate into higher DPU. Going forward, new leases (from new acquisitions) are likely to have upward rental revision only (instead of being pegged to CPI). This may be a good move, given that the demand for services at its assets (e.g. nursing homes) is strong, which could support a stronger growth in rent.
Still looking for acquisitions in Japan. PREIT aims to have Japan contribute 50% of its overall portfolio (currently 31%) eventually. Hence, it plans to focus more of its acquisition strategy towards nursing homes in Japan. With funding cost in Japan relatively low, management is confident that it would still be able to obtain a 7% NPI yield from Japanese assets. Another sign of the growing popularity of Japanese nursing homes is that PREIT is seeing more competition (from other real estate funds) for nursing homes. Management is unfazed, as PREIT has first mover advantage, having established a presence in Japan a few years ago.
Healthy balance sheet would be able to support acquisitions. With gearing at 33%, PREIT has debt headroom of SGD320m for further acquisitions, before breaching its internal target of 45%
A-REIT – OCBC
FIRST ACQUISITION IN THREE QUARTERS
- Raising S$406.4m via placement
- Acquisition yields at around 6%-handle
- Raising FV to S$2.60
Private placement of 160m new units
Ascendas REIT (A-REIT) has raised gross proceeds of ~S$406.4m through a private placement to institutional and other investors last Friday. The number of new units to be issued was up-sized from 140m units to 160m units (7.1% of total units outstanding) due to positive market demand. Issue price was fixed near the upper end of the indicative price range of S$2.50-S$2.55 at S$2.54 apiece. This represents a 35.1% premium to A-REIT’s NAV and a slight 4.2% discount to the last transacted price in its units. An advanced distribution of 2.70 S cents is expected to be paid on 25 Apr.
Proceeds to be used mostly for acquisitions
Management intends to use 31.0% (S$126.0m) of the gross proceeds to fund the potential acquisition of a property within Singapore Science Park II, another 66.4% (S$270.0m) to partially fund the potential acquisition of an integrated industrial mixed-use property at Kallang Avenue (currently under construction; value expected at ~S$490.0m), and the remaining amount for issue expenses and corporate/working capital purposes. We note that the upfront land premium introduced by JTC at the start of 2013 does not apply to both the Science Park II property (non JTC-leased site) and Kallang Avenue property (part of industrial government land sales). We project the initial NPI yields for both assets to come in at around the 6%-handle, comparable to A-REIT’s implied portfolio yield.
Maintain HOLD on valuation grounds
A-REIT anticipates its aggregate leverage to increase slightly from 32.8% as at 31 Dec 2012 to 34.6%, assuming that the potential acquisitions and committed investments are funded immediately after the placement. However, as the Kallang Avenue property is expected to obtain TOP only around mid-2014, we believe part of the proceeds may be used to repay debt pending its deployment. This is likely to improve its gearing to 30.3%, according to our estimates. We now factor in the proposed acquisitions and placement into our forecasts. This raises our fair value from S$2.43 to S$2.60. However, as A-REIT appears to be fairly priced, we maintain our HOLD rating.
HPH-Trust – AmFraser
Entrenching its leadership position
ACT acquisition a good strategic fit. On 7 March 2013, Hutchison Port Holdings Trust (HPH Trust) announced its acquisition of Asia Container Terminals (ACT) for a cash consideration of approx. HKD3.2bil. HPH Trust also procured an amount of HKD750mil to fund the full repayment of ACT’s existing indebtedness. ACT owns and operates Container Terminal 8 West (CT8W), which has two berths located in Kwai Chung, Hong Kong and has a concession lease that runs till 30 June 2047.
Stretching its footprint across Kwai Chung. The acquisition of two additional berths in Kwai Chung would allow HPH Trust to consolidate a stronger market position in Hong Kong. In 2012, HIT and COSCO‐HIT, HPH Trust’s portfolio container terminals in Kwai Chung, collectively achieved total throughput of 12.2mil TEUs, which translates into a market share of 53% in Hong Kong. Given CT8W’s throughput of 1mil in 2012, HPH Trust’s acquisition would bolster its market share to 57%.
Entrenching its position as the port of choice for mega‐vessels. Equipped with the largest number of long, contiguous berths, that not only caters well to mega‐vessels but also permits the simultaneous berthing of vessels, HPH Trust stands in pole position to leverage on Hong Kong’s status as a preferred regional transhipment hub. As CT8W is situated right beside HPH Trust’s existing berths, the acquisition would certainly strengthen HPH Trust’s competitive edge in this regard and leave it better positioned to cater to the continuing trend of increasing vessel sizes. Moreover, HPH Trust could potentially benefit from economies of scale and reap cost savings through an integration of its container terminal operations.
Compelling forward yield of 7.4‐8.3%. We expect the acquisition of ACT to be yield‐accretive given that the deal is entirely financed with debt. We raise our DPU forecast for 2013 from HKD43.1cents to HKD45.7cents, implying a forward yield of 7.4%, which is one of the most attractive yields on offer across the S‐REIT and business trust universe at present.
Raise TP to US$0.955. Supported by the strategic positives of massive operational scale, long contiguous berths as well as the relatively resilient nature of its throughput mix, HPH Trust remains favourably positioned to ride on the burgeoning intra‐ Asia and transhipment trade in the coming years. Therefore, we continue to believe that the current degree of undervaluation in HPH Trust remains unjustified. In our opinion, current valuations represent an attractive entry point for investors to partake the benefits of HPH Trust’s growth story as it unfolds over the longer term.
Cambridge – CIMB
Quality yields
We took management on a non-deal roadshow to Singapore, Hong Kong and Malaysia. We found investors generally less familiar with the industrial space and the role of government regulation in Singapore, which mitigates landlords’ exposures to uncertain macros.
IPO assets pave the way for 5-10% rent reversions and development works in FY13/14. Combined with record acquisitions and BTS projects from 2012, we estimate 5% CAGR DPU growth for FY13/14 and strong yield of 7%. We adjust FY13-15 DPUs on reversions and development works, raising DDM-based target price (7.7% discount rate). Maintain Outperform. Accretive acquisitions and development works are catalysts.
A regulated sector
We found offshore investors largely unfamiliar with Singapore’s industrial regulations. The oversupply risk was overstated, while the demand for industrial space was underestimated. JTC’s requirement of owners occupying more than 50% of space results in high pre-commitment levels, despite larger industrial pipeline supply (ex-business parks), while lease renewals before expiries and tenant requests for additional space point to business expansion within Cambridge’s portfolio of 169 tenants. The impact of new measures was a hot topic at the roadshow. Management said reducing the industrial lease tenure from 60 to 30 years had the biggest impact – it reduced demand for BTS projects.
Key drivers for 2013
Management announced nine acquisitions in 2012, with five competed in 2012, two completed YTD and two remaining. These deals, along with full-year contributions from 2012 AEI and developments completed, should lead to FY12-14 DPU CAGR of c.4%.The focus in the next two years will be on master leases expiring, 11% in FY13 and 22% in FY14. Some assets will be divested and others converted to multi-tenanted buildings with expected reversions of 5-10%. Planned plot ratio enhancements of S$50m-100m a year in FY13/14 are expected to boost growth further.
Sweet spot for acquisitions
The share price has re-rated and the stock now trades at a 15% premium to book value, making it easier for acquisitions to be accretive. Yet with vendors raising price expectations, Cambridge will focus on development projects over FY13-14 and ruled out pre-emptive equity fundraising.
HPH-Trust – Kim Eng
Final Piece to HK Jigsaw?
Light on details, but a positive. Hutchison Port Holdings Trust (HPHT) announced the acquisition of the entire stake in Asia Container Terminals (ACT) for a total cash consideration of HKD3,167m (USD408m) from DP World (55%) and PSA (45%). HPHT also procured the payment of HKD750m (USD97m) in ACT’s loans owed to DPW and PSA’s affiliates. All these would be financed entirely from a term loan facility agreement. We view this acquisition positively for three reasons: 1) it alleviates capacity constraints to growth in HK for HPHT, 2) HPHT expects the acquisition to be accretive to DPU, and 3) ACT is already an ‘overflow’ port for HPHT, and is hence tried and tested.
Look to cashflow instead of NTA. ACT’s NTA as of 31 Dec 2012 was HKD625m (USD81m). This implies a ~5x multiple of the acquisition price over NTA and looks demanding at first glance. However we believe this should not be used as a benchmark of value to HPHT despite the scant details revealed in the announcement. We instead prefer looking at the ACT acquisition from a discounted cashflow point of view, which, together with the above-mentioned financing rates were not disclosed in the announcement. Free cashflow is the pivotal metric to the investment thesis of HPHT being a strong yield play. For this, we take comfort from HPHT’s expectations of DPU accretion from this deal.
2 more berths at HK. Figures 1 and 2 summarise the key geographical details and available facilities for ACT, which feature 2 berths of 15.5m depth, and with lease expiry in 2047 (34 years’ time, similar to rest of HPHT berths).
Reiterate BUY as strong yield play. HPHT remains a strong yield play in our view, with distribution yields of 7-8% p.a. without including the ACT acquisition. We prefer to maintain our forecasts and adjust them once more details such as financing terms and ACT cashflow are made available – any DPU accretion remains as upside for now. HPHT remains a BUY, TP unchanged at USD0.93.