Cambridge – DBS

Stable Yields

• Unlikely to breach cash lock-up covenants
• Exploring various capital management initiatives
• Maintain BUY, TP S$0.38 based on DCF

Unlikely to breach cash lock-up covenants. With the recent refinancing of its $390m debt, CIT is faced with tighter cash lock up covenants of 50% loan-to-value and 2.5x interest cover ratio. However, we believe it is in no danger of breaching these limits as it would take a 20% decline in asset values and a 25% drop in EBIT to trigger this event. Recent revaluations done by comparable peers only showed a 3-5% decline in asset values. While we expect further downward adjustments to capital values, we believe declines would be more modest given the stable and long lease profile of its tenancies. In addition, the long lease terms with inbuilt fixed periodic rental escalations and no pre-termination clauses also mean a stable
income profile.

Unwinding initial swap strain cash flow, exploring various capital management initiatives. With the debt rollover and unwinding of its S$18m original interest rate swap (S$6m expensed p.a.), CIT is effectively paying out close to 120% of its operating cashflow over the next 3 years. The additional payment, to be funded by drawing down on its facilities, would put a strain on cashflow. Management of CIT is aware of this and is exploring various other avenues to address them such as a reduction in distribution payout or capital raising in the medium term. This could result in some earnings downside risks, which are currently not reflected in our forecasts.

Maintain BUY, TP S$0.38. CIT is trading at 0.4x P/BV and offers a stable prospective FY09-10F yield of 16% backed by a portfolio secured on long leases of 15 years. While we are mindful of potential capital management activities, we view this possibility as a medium term development to strengthen its balance sheet.