Month: April 2013
KGT – AmFraser
Uninspiring prospects
We initiate coverage on K‐Green Trust (KGT) with a SELL call and a fair value of S$0.80.
KGT is a business trust listed on the Singapore Exchange, with a focus on ‘green’ infrastructure assets. KGT’s portfolio contains three assets, namely Senoko Waste‐to‐Energy (WTE) Plant, Keppel Seghers Tuas WTE Plant and Keppel Seghers Ulu Pandan NEWater Plant. Out of the three assets, we estimate that Senoko WTE plant accounts for approx. 70% of KGT’s overall cash flows. KGT’s assets are held on long‐term concession agreements with statutory bodies such as NEA and PUB, which have a remaining concession term of between 11 and 21 years.
Look before you leap. On the surface, KGT’s 7% yield may seem enticing compared to the average 5.8% yield across S‐REITs and business trusts at present. However, we note that KGT’s 7% yield comprises both a partial return of capital and free cash flow yield. We estimate that KGT’s partial return of capital makes up approx. 68% of its overall distributions, implying that its true free cash flow yield is merely a low 2.2%.
Self‐liquidating. We believe a 7% yield is insufficient to compensate for the cost of its lease runoff and declining NAV. With the concession agreement for the Senoko Plant expiring in 11 years’ time, we expect its overall distributions to be more than halved post 2024. Subsequent to the expiry of Senoko’s concession agreement, the concession for the Ulu Pandan Plant would cease in 2027, resulting in another step‐down in distributions. Moreover, the acquisition cost of KGT’s assets is recognized as service concession receivables, which will decline gradually as KGT receives its fixed capital cost payments from the NEA and PUB over time.
Limited scope for organic growth. According to KGT, its WTE plants namely Tuas DBOO Plant and Senoko Plant are already operating at near full capacity and therefore have limited room to take advantage of higher energy demand. While there is scope for capacity expansions at the Ulu Pandan Plant, there are currently no plans to commit capex to increase capacity at the plant.
Any upside will have to come from acquisitions. Although KGT’s zero gearing level is a plus, its inability to act on any acquisitions since its IPO listing probably brings into question its ability and willingness to leverage on its clean balance sheet and build on its existing cash flow stream. Given the management’s conservative approach towards acquisitions, we are currently not factoring in any acquisitions in our model.
A-REIT – CIMB
Building for the long-term
4QFY3/13 was another positive quarter as AREIT executed its growth strategy well, aided by a portfolio of quality assets and past investments. With steady DPU growth and a defensive balance sheet, AREIT should benefit from the recent resurgence in demand for yields.
At 22% and 98% of our FY13 forecast, respectively, 4Q13 and FY13 DPU broadly met our and consensus forecasts, with the slight variance resulting from a performance fee. We nudge up our DPUs and DDM-based target price as we factor in the results and a lower discount rate of 6.4%. Maintain Outperform on the catalysts of accretive AEI and developments.
A steady quarter
AREIT put up a steady performance in 4QFY13. FY13 DPU was up 1.3% yoy and would have risen 3.6% if not for a one-off performance fee. Yoy growth came from an 11% rise in NPI as higher property taxes and other property expenses eroded part of a 14% revenue increase. The portfolio remained healthy with weighted average reversions of 14.5% in 4Q, just shy of 3Q’s 18.5% as portfolio occupancy remained a fairly healthy 94.0% despite increased conversion of single-tenanted buildings to multi-tenanted ones. Current market rents remain 9-35% higher than passing rents due for renewal in FY13/14, which coupled with AEIs to upgrade older assets, should position AREIT well for rental reversions.
Disciplined on acquisitions
Management continues to eye only quality assets for acquisition. Given elevated asset values, it believes that its competitive advantage lies in developments, aided by its fairly light balance sheet (30% asset leverage after committed investments). AREIT is also warming up to overseas acquisitions in Iskandar and China, with increased inclination towards developments to ensure asset quality. It announced a new BTS development of DBS Asia Hub Phase 2 in 4Q and continues to make leasing headway on past investments.
Maintain Outperform
With a quality asset portfolio, in-built growth as past investments come onstream and defensive capital management, AREIT should benefit from the recent hunt for yield.
KepREIT – MayBank Kim Eng
Another Steady Quarter
DPU flat QoQ. KREIT reported a 1Q13 distributable income of SGD52.2m (+1% QoQ; +8% YoY), resulting in a 1.97 cts/unit DPU which was similar to 4Q12’s and in line with expectations. We believe that the potential for further equity fund-raising remains, either to pare down its gearing or to fund the acquisition of KepLand’s one-third stake in MBFC Tower 3 sometime in the future. Maintain HOLD.
Assets reporting healthy occupancy rates. KREIT’s portfolio occupancy edged up from 98.5% as at end-2012 to 98.8% as at 1Q13, mainly as OFC’s occupancy rate crept up from 95.9% to 96.6% in the same period. With only 3.5% of leases expiring for the rest of 2013 and another 4.4% in 2014, we expect vacancy risks to be largely mitigated. In fact, KREIT’s weighted average lease expiry (WALE) of 6.9 years remains one of the longest among the S-REITs.
No mention of MBFC Tower 3. In KepLand’s latest update, MBFC Tower 3’s occupancy rate crept up from 79% as at end-2012 to ~84% as at end-Feb. We believe that demand from more non-financial tenants in the coming months could take Tower 3’s occupancy rate above 90% possibly in 2H13 and when that happens, we believe the asset is more amenable to be acquired by KREIT.
More fund-raising still possible. KREIT undertook an opportunistic private placement in Feb to raise gross proceeds of SGD53.2m (40m new units at SGD1.33/unit), which would be largely used for debt repayment and working capital purposes. However, its gearing remains high at 43.3% post-placement, suggesting that more equity will have to be raised to fund the potential acquisition of Tower 3, which we value at SGD1.1b. In our opinion, this could happen in the coming months to take advantage of the stock’s current 1.1x P.B valuation.
Short-term weakness quite possible. We raise our target price slightly to SGD1.27 as we fine-tuned our model, but maintain our HOLD recommendation on the back of limited upside. In addition, KepCorp will be distributing a portion of its stake in KREIT to its own shareholders as dividend-in-specie. The shareholders will receive their KREIT units on 8 May and we expect some sell-down from those shareholders who do not wish to have KREIT in their portfolios.
MLT – OCBC
VALUATION LOOKS FAIR NOW
- Positive expectations likely factored in
- Caution on various fronts
- Further upside appears limited
Strong recent price performance
Mapletree Logistics Trust’s (MLT) units have performed very well since our last report on 25 Mar, notching a 8.7% gain versus a 1.5% increase in the STI and 4.9% increase in the FTSE ST REIT Index. We believe investors are finally acknowledging MLT’s attractiveness due to a confluence of factors. Firstly, MLT is likely to put on a good showing for its 4QFY13 results on 17 Apr, with DPU possibly accelerating 5.8% YoY to 1.80 S cents on the back of incremental rental income from its newly acquired Korea and China properties. Secondly, MLT is likely to record a meaningful gain in its asset values as part of the annual revaluation exercise, and this may in turn boost its NAV and improve its gearing level. In addition, the sweeping monetary easing by Bank of Japan announced last week has likely spurred much interest in MLT’s units, as it is expected to benefit from its exposure in Japanese properties.
Unit looks fairly priced now
At a P/B ratio of 1.45x, however, we believe MLT is now fairly priced. While ~55% of its revenue is derived from overseas assets, we are mindful that a substantial 658k sqm of supply in warehouse space (8.9% of total 4Q12 warehouse stock) is expected to be delivered to the Singapore warehouse market in 2013. This is likely to exert pressure on warehouse occupancy rates as well as cap the rise in rentals and the rate of positive rental reversions achieved by MLT in the near term. In addition, with the introduction of the cooling measures in the industrial market and upfront land premium by JTC, investors are inevitably more cautious as it may now be more onerous for industrial landlords to acquire properties. Given the market conditions, we believe that any upside in MLT’s units is limited at the current juncture.
Downgrade to HOLD
We tweak our RNAV assumptions and roll over our valuation to FY14. This raises our fair value from S$1.25 to S$1.34. Downgrade MLT from Buy to HOLD on valuation grounds.
Fortune – OCBC
STRONG FUNDAMENTALS
- HK sales rebound
- No impact from proposed Park’N Shop boycott
- Maintain BUY
Good HK retail sales
The growth in HK’s retail sales has picked up significantly since 4Q12. Combining the first two months of 2013 to eliminate distortions from the timing of Chinese New Year, retail sales climbed up 15.8% in value and 15.5% in volume. According to a government official, the generally stable labour market conditions and vibrant tourism should continue to lend support to retail business in the near term, although there are still notable headwinds on the external front. Provisional statistics from the HK Tourism Board indicate that the tourism expenditure associated with inbound tourism grew 16.5% YoY in 2012 to HK$306.5b. In contrast, Singapore’ retail sales fell 2.0% YoY in Jan 2013, and tourism receipts grew by only 3% YoY to S$23b in 2012. Robust retail sales will continue to underpin the growth in retail rents throughout HK.
No worries over call for Park’N Shop boycott
The media has reported that a group has called for the boycott of Park’N Shop supermarket chain, which is part of Li Ka-shing’s Hutchison Whampoa Ltd, in support of dock workers who are striking for better work conditions. The workers are employed by Hongkong International Terminals (HIT) either directly or through contractors. HIT is a subsidiary of Hutchison Port Holdings Trust, which is owned by Hutchison Whampoa Ltd. Park’N Shop is FRT’s top tenant, accounting for 8.0% of the REIT’s total gross rental income in Dec 2012. According to FRT management, the incident is not affecting FRT malls. Businesses are running as usual and impact to the sales of the Park’n Shop outlets in FRT’s malls has not been seen.
Another solid year ahead
Overall rental reversion in 2012 was high at 19.8%, partially because of the low base in 2009. Management has indicated that 2013’s rental reversions are likely to be in the mid-teen percentages. It is worthwhile emphasising that FRT has a low gearing of 23.4% and no refinancing needs till 2015.
Maintain FV
We are maintaining our fair value of HK$7.28 and BUY rating on FRT. FRT is trading at a low P/B of 0.78x.