Author: kktan
SPH REIT – CIMB
2015 to be stable
SPH REIT’s 1QFY15 DPU was up 2.3% yoy and broadly in line by meeting 22% of our FY15 forecast. Improvements came from higher rental income and margins. We expect FY15 to be a stable year, with 100% occupancy and only 11-13% of the leases set to expire. 2016-17 should be more exciting, with more lease expiry, AEI completion, and potential stabilisation and acquisition of The Seletar Mall. We trim our DPS estimates slightly (leading to a lower DDM-based TP) and keep our Hold call as we think that the positives of its stable portfolio have been priced in at 5.8% FY15 dividend yield and 1.12x P/BV. We prefer to wait for cheaper valuation or greater clarity on future leasing demand.
Results highlights
1QFY15 DPU was up 2.3% yoy, and would have been 4.8% up yoy if not for the S$0.5m retained in the quarter. Improvements came from both higher rental income and margins stemming from savings in utilities, marketing and maintenance costs. During the quarter, 4.9% of the leases by NLA expired and a healthy rental reversion of 12.9% was recorded.
2015: expect stable portfolio and balance sheet
With 100% occupancy and only 11-13% of the leases set to expire in FY2015, we expect SPH REIT to see stability as supply of retail spaces along Orchard Road is limited. Its balance sheet remains strong, with gearing at 26%. Management has hedged ~55% of its debt with no refinancing required until 2016. Its average cost of debt is at 2.35%, up slightly from 2.33% in the previous quarter.
Maintain hold, wait for cheaper valuation or 2016-17
We maintain our Hold rating as we believe that the positives of SPH REIT have been priced in at 5.8% FY15 dividend yield and 1.12x P/BV (vs. 5.6% and 1.07x for its retail S-REIT peers respectively). We expect 2016-17 to be more exciting years for SPH REIT, given 1) AEI will create ~10,000 sq ft of NLA at Paragon, with 5,000 sq ft expected to be completed by FY16 and generate ~S$1m of rental income annually, and another 5,000 sq ft to be phased in from FY16; 2) ~26% and 35% of leases by NLA to expire in FY16 and FY17 respectively; and 3) potential stabilisation and acquisition of The Seletar Mall, which has opened on 28 Nov 2014 with 99.6% committed occupancy. We will wait for cheaper valuation or greater clarity on future leasing demand before accumulating.
FirstREIT – AmFraser
We initiate coverage on First Real Estate Investment Trust (First REIT) with a BUY rating and a fair value of S$1.380 based on a dividend discount model. First REIT’s 6.4% FY15F yield is anchored by long master leases, with ~95% of the rental income from Indonesia’s healthcare sector backed by Lippo Karawaci and Siloam Hospitals. First REIT stands to benefit from its sponsor’s huge asset pipeline which may continue to offer very attractive yield.
Distribution underpinned by long master leases. First REIT boasts of a long portfolio WALE of10.7 years, with the first renewal coming due only on 2017. As~98% of the rents are priced and paid in SGD with rental growth rates at twice Singapore CPI growth, subject to a cap of 2% and a floor of 0%, the long master leases offers a partial hedge against inflation.
A huge asset pipeline ahead. After acquiring 12 properties and enlarging the portfolio nearly fourfold to S$1.2b since IPO in 2006, we estimate that 28 more assets remain in the pipeline. Typically acquired at high 9% to high 10% rental yield with at least 9% discount to valuation, the acquisitions have been highly accretive to DPU and NAV.
Asset sustainability with long lifespan. The Indonesia assets, which constitute ~96% of property valuation, are on Hak Guna Bangunan (Right to Build), which is essentially leasehold tenure. Nevertheless, there is a possibility for renewal after the expiration of the initial lease period of 30 years and an additional term of 20 years. Meanwhile, First REIT is poised to benefit from the developments in the Indonesia healthcare market.
Initiate BUY with target of S$1.38 with more upside on acquisitions. We see a 15% upside (incl dividends) with our DDM -derived price target. The target price could prove to be conservative, given that it is based only on the current portfolio of assets. If we assume that First REIT acquires another 6 properties with purchase and lease details (e.g. size of asset and NPI yield) that is similar to the average of the most recent 6 acquisitions, our target price rises to S$1.49 (23.0% upside).
AscottREIT – OCBC
Inorganic driven growth
- 3Q14 DPU +14.7% YoY on adjusted basis
- Acquisitions to fuel growth ahead
- Preferred hospitality REIT
3Q14 DPU in-line with our expectations
Ascott Residence Trust (ART) reported a 8.9% YoY increase in its 3Q14 revenue to S$93.7m, but DPU fell 11.0% to 2.11 S cents, as 3Q13 included one-off items amounting to S$1.5m. Adjusting for this and a rights issue exercise, ART’s DPU would have increased 14.7% YoY. Topline growth was largely driven by contribution from acquisitions made in 2014 and organic growth from its existing portfolio to a smaller extent. For 9M14, revenue rose 12.7% to S$262.2m. DPU dipped 14.6%, (but jumped 7.9% after adjusting for one-off items and effects from a rights issue) to 6.04 S cents. This formed 75.5% of our FY14 forecast, and we view this as within our expectations.
Still positive on outlook
Although ART’s RevPAU for its serviced residences declined 4% YoY to S$128 in 3Q14, this was largely due to the acquisitions of two assets in Wuhan and Xi’an, whereby the average daily rates are lower as compared to the tier-1 cities. From a same store perspective, we understand that ART’s RevPAU for its overall portfolio still rose 2% YoY in 3Q14. Looking ahead, management expects its portfolio to remain resilient despite the macroeconomic uncertainties. It has also hedged 70% of its estimated FY14 distribution income denominated in EUR and GBP and ~50% of its JPY exposure for FY14. While ART has yet to put in place FX hedges for its FY15 distribution income, we expect management to pro-actively monitor the situation and enter into forward contracts in the near future.
Maintain BUY
We incorporate ART’s recent accretive acquisitions in our model, and raise our FY14 and FY15 DPU forecasts by 1.9% and 2.2%, respectively. Our RNAV-derived fair value estimate is thus bumped up from S$1.33 to S$1.37. We reiterate BUY on ART, and recommend the stock as our preferred pick within the hospitality REITs sector. We believe its large, diversified portfolio of serviced residences offers better visibility and stability as compared to hotel assets. ART is also trading at an undemanding forward P/B ratio of 0.9x, while FY14F and FY15F distribution yields are attractive at 6.6% and 7.0%, respectively.
APTT – DBSV
High yield maintained
- 3Q14 EBITDA of S$48.0m (+3% y-o-y,-1% q-o-q) was c.5% below expectations; quarterly distribution of 2 Scts per share in line
- Softer economy led to muted premium cable and broadband growth, offset by lower opex
- Stock offers 9.4% yield on 8.25 Scts distribution in FY14; FY15 distribution to be equal or better
- Maintain BUY with unchanged TP of S$ 0.91
Highlights
Revenue impacted by softer economy
- Revenue of S$ 80.5m (+2% y-o-y and q-o-q) was c.2% below our expectations. Growth in premium cable and broadband lagged expectations with lower than expected subscriber growth and Average Revenue Per User (ARPU). The company expects to miss its forecasted revenue target of S$ 323.8m in FY14. EBITDA dropped on lower revenues
- Lower revenues were partly offset by lower than expected operating expenses. EBITDA is expected to remain strong via expansion into Greater Taichung area due to its better access to funding and superior content portfolio.
Outlook
Network expansion on track
- Operations in the new coverage areas are expected to commence in 4Q14. APTT is expected to ramp up capex to S$ 20m – 30m in 4Q14, up from S$ 9.5m in 3Q14. The benefits of capex spend is expected to be seen in FY15. Further capex of S$ 20m – 30m is expected in FY15-FY16, in line with our expectations. Existing borrowing facility sufficient for growth capex
- APTT has ~S$88m of funding facility available for growth capex, with most of the tax settlement already done (~S$ 4m remaining). This should be sufficient for expected capex of S$ 40m-60m in the next few years.
Valuation
Maintain BUY with DCF-based (WACC 7.2%, terminal growth 0%) TP of S$0.91.
AscottREIT – CIMB
Fairly valued
3Q14 gross revenue and DPU came in at S$93.7m (+8.9% yoy) and 2.11 Scts (-10.8% yoy), respectively. This set of results was in line with our estimates, with 3Q DPU accounting for 25% of our full-year estimate and 9M14 forming 72%. Factoring in the recent acquisitions, associated financing costs and perpetual securities issued, we maintain our Hold rating with an unchanged TP of S$1.30 as we tweaked our FY14/15 DPU forecasts by +0.6%/+1.3%.
Higher RevPAU in most markets
Ascott Residence Trust’s (ART) 3Q14 higher revenue was mainly due to the additional contribution from the nine properties acquired during the year. On a same-store basis the top line was flat (+0.3% yoy). DPU was significantly weaker, mainly due to dilution from the new shares issued in Dec 13 and the lack of the one-off distribution of c.S$1.5m made in 3Q13. Revenue per available unit (RevPAU) in 3Q14 for countries with management contracts was generally stronger, with UK and Japan growing by 2% and 10%, respectively, mainly due to strong corporate and leisure demand. Belgium, Spain and Australia posted growth of 15%, 29% and 27%, respectively, as a result of higher demand for refurbished apartments. On the other hand, Singapore and Vietnam posted poorer RevPAU due to lower corporate accommodation budgets while China and the Philippines were weaker due to the repositioning of the portfolio. Indonesia also posted a weaker RevPAU (-3%) this quarter.
Some acquisitions better than others
Although the top line will continue to benefit from the recently-announced acquisitions (three in Australia and one in Japan), we prefer the Australia acquisitions given i) the fixed lease contract, and ii) anticipated yield accretion (funding cost of 5% vs. initial NPI yield of 7.7%). For the Japan acquisition, given i) the initial yield of c.4.5%, ii) estimated capex of S$11m required for the AEI at this property, and iii) associated financing cost (estimated at 3.4-3.8%), we hold a neutral view as we believe the targeted yield of 5% post AEI will have a minimal positive impact on DPU after taking into account management fees.
Maintain Hold
As we believe the full potential from most of the assets acquired this year will not be realised in the near term, the dilution effect is expected to persist. On this basis, we have maintained our Hold rating with unchanged TP of S$1.30.