PCRT – CIMB

Leasing progress

Further strengthening of operational malls in 3Q12 and leasing progress at upcoming malls ahead of commencement augur well for 2013.While interest costs inched up, loan facilities provided sufficient financing to meet future cash commitments.

3Q DPU accounted for 25% of our full-year estimate while 9M12 DPU made up 74%, in line with our and consensus expectations. We roll over estimates to FY13, reducing the target price to S$0.59, now based on a 30% discount to RNAV (previously 35%) as more assets are operational. We maintain Outperform, with stronger leasing and retail sales as catalysts.

Operational improvements

Underlying operational performance saw a second quarter of pick-up with profits from operational malls growing 6% qoq. While 4Q12 could be slower due to leasing difficulties in winter, we should see further strength in 1Q13. 60% of NLA at Shenyang furniture mall has been converted to a master lease for income stability while further leasing progress has been made at the upcoming Shenyang office, Foshan Jihua mall and Chengdu Qingyang mall.

Balance sheet strength

Interest cost is our main concern following issuance of S$130m of 6.375% 3-year notes in Sep, bringing 3Q’s weighted average financing cost to 4.74% (2Q12: 2.96%). 9M12 interest expense was above at 80% of the FY12 estimate. We expect potential partial onshore funding of Chengdu Longemont to raise financing cost further but loan facilities should be sufficient to meet cash commitments. Factoring in future progress payments, we estimate c.40% gearing in 2013 and 2014, within management’s internal limit of 50% (3Q12: 30%). Monetisation of assets in 2014-16 could fund further acquisitions. Management estimates 25-40% IRR if assets are monetised in 3-4 years after commencement.

Dividend buffer

Earn-out structures alone guarantee 8-9% dividend yield. We see potential for stronger yields in FY13-14 on improved operations.