Author: kktan
CMT – CIMB
Upgrade on valuation
CMT’s 3Q14 DPU was in line with expectations and made up 73% of our fullyear estimate. While organic growth is likely to remain anemic in the nearterm, tenant sales and shopper traffic are seeing some traction, with lower yoy declines. Driving near-term growth would be the new AEI works at Bukit Panjang Plaza and P2 of IMM makeover. Post the recent market weakness, CMT offers an attractive 16% total return, based on our DDM-backed target price of S$2.11. We upgrade our rating to Add from Hold on valuation.
In line set of 3Q numbers
CMT reported 3Q14 revenue and NPI of S$164.6m and S$114.1m, up 2.9% and 3.3% yoy, respectively. Distributable income came in at S$93.7m, translating to a DPU of 2.72Scts. Better performance was largely due to higher revenue from Tampines Mall, J8, Plaza Singapura and Bugis Junction (on completion of its AEI), while J Avenue at IMM opened in Sep 14. Portfolio occupancy was 98.5% while rental reversions averaged +6.3% over the previous period.
Smaller tenant sales and shopper traffic drag
While consumer retail spending remained cautious, shopper traffic and tenant sales performance across CMT’s portfolio gained some traction, down a smaller 1.5% and 3% in the 9M compared to -2% and -3.7% in 1H14, and representing a second consecutive quarter of improvements in these metrics. We expect the rental trend for the remaining 2.9% and 28.1% of rental income to be recontracted in 4Q and 2015 to be modest. Earnings enhancements via AEI would be an increasingly important factor to drive growth going forward. In this regard, commencement of AEI works at Bukit Panjang Plaza, scheduled from 4Q14 to 3Q16, should add to the bottom line. The $18.5m AEI will free up 18k of commercial GFA and generate a projected ROI of 8%. In addition, P2 of
conversion of space into outlet stores at IMM are currently underway. In the medium term, there are plans to evaluate new initiatives at Funan Mall with a view to tap the unutilised 380,000sf of commercial GFA. Balance sheet is strong with gearing at 34.1%.
Upgrade to Add
With the recent decline in share price, CMT is now offering 16% total return to our current target price of S$2.11. At this level, we think CMT is worth a relook and upgrade our call to Add from Hold. Catalysts from stabilisation in tenants’ sales performance and shopper traffic count, as well as accretive AEIs and potential acquisitions in the longer run, should drive share price performance.
SPH REIT – DBSV
Steady ship in the inaugural year
- 4Q14 DPU of 1.39 Scts exceeded forecast by 6.1%
- Positive rental reversions; NAV up 4.4%
- Maintain HOLD, TP revised to S$1.03
Highlights
DPU of 1.39 Scts exceeded IPO forecast by 6.1%.
- Revenue and net property income of S$51.1m and S$38.0m were 2.6% and 5.6% higher against forecast. Portfolio rental reversions remained strong – Paragon achieved rental uplifts of 10.5% YTD, while Clementi Mall secured 5.5% higher rents YTD. However, we note that tenant sales for Paragon and Clementi mall were down 4.5% and 3.3% y-o-y, respectively, while foot traffic remained stable. The property portfolio was revalued up by c.3.4% to S$3.05bn, lifting NAV per share by 4.4% to S$0.93. Gearing headed lower to 26.0% as a result.
Investment Thesis
Stable Earnings Outlook
- With rentals already at market rates and retailers outlook still fairly weak due to the decline in tourist arrivals and poor retail sales, further rental hikes at both Paragon and Clementi Mall going forward appear modest. Limited acquisition prospects in the near term
- Seletar Mall (its ROFR asset from its sponsor, SPH) is expected to complete in Dec’14 and is the next main growth catalyst for the SPH REIT. However, we believe an acquistion timeline for this mall to come only in 2016 onwards after stabalization. Till thn, we see limited scope for acquistions.
Valuation
HOLD. Target Price S$1.03. Our revised target price of S$1.03 is based on DCF after accounting for lower units/debt levels. At current price, the stock appears fairly valued at a forward yield of 5.4%. We maintain our HOLD call given its premium valuations vs peers.
Risks
Interest rate risk
- SPH REIT will be negatively impacted when its loans are refinanced in an environment of rising interest rates. This risk is mitigated through having a staggered debt maturity profile with nil refinancing till 2016. Reported average interest cost of 2.33% is slightly lower than IPO forecast of 2.35%.
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.
MLT – CIMB
Expect one but ended with two
MLT announced that the acquisition of MZLP was completed today.Surprisingly, the acquisition of the previously speculated MYBLP was also completed today at a purchase consideration of S$42.8m. Given the 100% occupancy in both properties, the acquisitions of which were funded via debt, they are expected to boost DPU cumulatively by c.1.4%. Consequently, we upgrade MLT from Hold to Add, with a slightly higher DDM-based (discount rate: 8.0%) TP of S$1.24, as we tweak our FY15-16 DPS estimates upward by c.1.9% while anticipating more acquisitions to come through in the mid-term.
What Happened
Mapletree Logistics Trusts (MLT) today announced that it has entered into two separate sale and purchase agreements with its sponsor for the acquisitions of: 1) Mapletree Yangshan Bonded Logistics Park (MYBLP) for a purchase consideration of Rmb197.2m (S$41.1m), and 2) Mapletree Zhengzhou Logistics Park (MZLP) for a purchase consideration of Rmb205.6m (S$42.8m).
What We Think
The acquisition of MZLP has been highlighted previously on 21 July 14 and as such, this transaction has already been factored into our model. However, the acquisition of MYBLP, though previously speculated, was only confirmed today. MYBLP is a grade-A logistics facility with a GFA of 46,000 sq m comprising two blocks of single-storey warehouses with mezzanine offices. Currently, this facility is fully leased to two international 3PLs – Ocean East Logistics of the Maersk group and Air Sea Transport, with a weighted average lease term to expiry of 2.1 years. Both acquisitions were completed today. MYBLP is expected to achieve an NPI yield of 7.5% (slightly lower than the 8.0% yield projected for MZLP). Based on our estimates, MYBLP will be mildly yield accretive, boosting DPU by c.0.6%. With the two acquisitions, DPU is expected to rise by c.1.4% while leverage ratio will rise to c.35.3% (from 34.5%).
What You Should Do
Despite the tight market for good quality assets, we believe MLT will continue to expand via future acquisitions. After all, its sponsor still has sizeable logistics developments yet to be injected into the trust. On this basis, coupled with a slightly higher DPU forecast as a result of these acquisitions, we upgrade our rating to Add, with a slightly higher TP of S$1.24. Currently, MLT offers a FY15/FY16 dividend yield of 6.9%/7.1% – a level we do not consider demanding.
FE-HTrust – CIMB
First development project
FEHT has announced its first JV with FEOC – development of an upscale/mid-tier hotel project in Sentosa. While viewed as a positive, the project’s end-FY18 slated completion is expected to have minimal impact to the
company’s DPU in the near term. As such, with the stock having corrected by c.6.0% recently, coupled with the long-term positive impact from this project, we upgrade FEHT to Hold from Reduce, with a slightly higher DDM-based (discount rate: 9.0%) TP of S$0.83.
What Happened
Far East Hospitality Trust (FEHT) announced that it has entered into a joint venture (JV) agreement with Far East Organisation Centre Pte Ltd (FEOC) to develop a new S$443.8m hotel in Sentosa, Singapore. FEHT will contribute c.S$133.1m and hold a 30% stake in the JV. This project, with a 60-year leasehold, is an integrated development comprising two hotels: 1) ‘Outpost’ – 230 rooms targeting the upscale market, and 2) ‘Village’ – 620 rooms targeting the mid-tier segment. The project is targeted to be completed by end-FY18.
What We Think
Given that FEHT’s contribution to the proposed JV will be fully funded via debt (leverage ratio expected to rise to 34.4% post completion of the project), we view it positively as no equity dilution is expected consequently. In addition, this project is uniquely positioned to fill the mid-tier accommodation gap in Sentosa. Mid-tier rooms currently account for 8.1% (245 rooms) of total available hotel rooms in the vicinity. With an estimated average occupancy of c.80%+ in Sentosa and an average rate of low to mid S$200 per room/night for the mid-tier hotel rooms, we believe this is an underserved segment that FEHT can tap via the JV. Furthermore, by entering into the JV at this stage, FEHT is able to lock in lower cost of investment as compared to acquiring the development post-completion (development cost is c.38% lower than the average transacted price of hotels across Singapore). FEHT holds the ROFR to acquire the balance 70% stake of the hotel once the hotel stabilised.
What You Should Do
Given that this asset will only be completed at end-FY18, while the higher incurred interest payment, as highlighted by management, will be treated as non-capex expenditure, we project DPU to be minimally affected in the near term. With the recent correction to share price by c.6.0% and in view of its long-term prospect tapping an underserved market, we upgrade FEHT to a Hold with a slightly higher target price of S$0.83