PCRT – CIMB

Limited downside

Two key pieces of information in the PREHL circular warrant a relook at PCRT 1) the value within PREHL, and 2) the plan for strata sales of up to 50% of PREHL’s China assets, which will reduce funding risks. We upgrade PCRT from reduce to Hold, with a slightly higher target price (still at 30% discount to RNAV) as we adjust our rental estimates.

We cut FY15-16 DPS by 11-15% for the delayed opening of Chengdu Dongzhan Mall and potentially higher pre-opening expenses.

Cheaper entry via PCRT

Our preliminary estimates show that PREHL could be valued at an RNAV of $2.11-2.25/share assuming a 50.1-100% acceptance level for its voluntary offer for PCRT. This RNAV is supported by growth and value creation in its development assets in China, which make up almost 70% of PREHL’s GAV. These assets will be purchased by PREHL at a 25% discount to their residual land value and development margin is estimated at 20-25% on completion. While peer comparison studies show that PREHL could trade up to a fair 40% discount to RNAV, entry via PCRT (and subsequent acceptance of VO of PREHL shares) implies an entry point at 53-56% discount to PREHL’s RNAV, indicating that any downside has been fully priced into the trust.

Potential 3-step re-rating for PREHL

In the longer run, by swapping PCRT units for PREHL shares, investors can look forward to a re-rating of PREHL when i) strata sales of up to 50% of units in Chengdu and Beijing are realised in 2015, ii) China assets in are completed in 2016/17, where recurring rental income for the remaining 50% of the assets will commence and PREHL should record significant revaluation gains, and iii) stabilisation of investment properties in 2019/2020.

Upgrade to Hold

We raise PCRT from reduce to Hold. PCRT’s share price is 5.5% below the level prior to the PREHL-related announcement and is trading at an implied 53-56% discount to PREHL’s RNAV. Post the VO, investors in PCRT will have exposure to a larger portfolio of Singapore and China investment and development properties, which will enable them to benefit from both recurrent income in Singapore and development and revaluation upside from China projects. In the meantime, while downside risk is limited, near-term upside for PCRT may be capped by higher perceived risks for development exposure and income vacuum from the cessation of earn-out support in 2015.