Author: tfwee
PST – OCBC
No respite yet
Container market continues to struggle. A new Drewry Shipping Consultants’ report projects a 10.3% market contraction in global box traffic over 2009, and a small 1% growth next year. It estimates that 27m fewer TEUs will be handled for the year than in 2007. Drewry also says “continued unsustainable freight rates” are pushing smaller companies to the brink of financial collapse. The head of Maersk Line said in an interview last week that growth in shipping volumes in 2010 is unlikely – he expects capacity utilization in the industry to fall further over the next 12 months1 . July is a key month as some major liners implement widely publicized rate increases. Trans-Pacific carriers have also proposed rate hikes starting August to bring freight rates back to ‘compensatory levels’. It remains to be seen if these increases take hold in the broader market.
CSAV uncertainties remain. Pacific Shipping Trust (PST)’s negotiations with its charterer, CSAV, have yet to be formally resolved. CSAV won concessions from other ship-owners in late May. According to Lloyd’s List, charter rates for 85 vessels will be cut by 36% for two years with the owners accepting half of the cash equivalent of the rate reduction in terms of shares in CSAV. It is unclear whether a renegotiation with PST, which has two vessels chartered out to CSAV, would parallel this deal or take another shape entirely. CSAV has also raised US$145m in new equity with the sale of more than 300m new shares in the company. Counterparty risk of default (on CSAV) has certainly moderated and we are more sanguine about how negotiations play out. Nonetheless, the devil is in the details and there is no guarantee that the ultimate deal will be equally favorable to both sides. The reaction of PST’s lenders to any concessions granted is also an unknown.
Valuation. PST faces uncertainty on two fronts – the CSAV renegotiation and a sickly container industry. Industry concerns are a deeper and likely more protracted overhang on PST in our opinion. Current price levels present deep value but with little evidence of an imminent industry turnaround, we think it is presumptuous to turn buyers. We bump our fair value estimate up to US$0.24 from US$0.16 to reflect moderated risks on the renegotiation. This represents a 30% discount to our ‘normal’ case discounted FCFE value of S$0.34 (10% discount rate). Our estimates (which assume a 30% cut in charter rates to CSAV) are unchanged. Maintain HOLD.
Suntec – CIMB
Retail catalysts
• Maintain Outperform. We believe there is room for upside surprises from SUN’s retail segment, from a higher catchment population after the opening of two new MRT stations at Suntec City, and direct linkage to the Marina Bay integrated resort. Additionally, Chinese and Indian tour agencies are starting to market Singapore as a single tour destination over their traditional marketing of Singapore as a stop-over destination. This change should have a significant impact on the length of visitors’ stay in Singapore, and hence retail spending.
• Supply overhang in office; but cost-competitiveness also increases. New office supply of 9.8m over the next five years as well as 400,000-600,000 sf of potential shadow space from 2010 is likely to depress a rental recovery. On the other hand, this development should also improve Singapore’s cost-competitiveness vs. its regional competitors, Hong Kong and Tokyo. We expect continued low rents to support occupancy. A pick-up in leasing volumes in recent months is a sign that occupancy could turn out less depressed than expected.
• DDM-derived target price of S$1.07 (discount 9.4%). We like Suntec REIT for its: 1) quality office and retail portfolio; 2) low leverage of 34.4%; 3) absence of refinancing concerns until 2011; and 4) severely discounted price for a possible fall in asset values. We believe that downside risks for the office sector have been factored into its share price while upside surprises from its retail segment have largely been neglected.
PLife – CIMB
Steady performer
• Maintain Outperform. PLife’s exposure to the resilient healthcare sector, long lease structures of up to 15 years and built-in rent increases pegged to the CPI give greater clarity to its income streams than the other REITs under our coverage. Downside risks to the topline are almost zero for its Singapore portfolio which contributes 80% to PLife’s revenue. With low asset leverage of 23% and the absence of debt maturity till 2H10, PLife is positioned for stable growth even in a difficult financial climate.
• Acquisition rationale and strategies. While short-term acquisitions are likely to remain opportunistic, medium-term targets will likely come from low-risk countries with quality healthcare assets and transparency in government regulations. Management will also attempt to keep similar leasing arrangements for future acquisitions so as not to erode the defensiveness of the REIT. In the longer term, management intends to cut down concentration risks from its major tenant and sponsor Parkway Holdings to 60%. As offers from cash-strapped healthcare operators continue to grow and capital markets seem to be opening up again, we expect acquisitions to be a kicker for PLife.
• DDM-derived target price raised to S$1.24 from S$1.20. This is based on a lower discount rate of 7.9% from 8.1% earlier due to a lower risk-free rate of 4.8% applied across our REIT universe.
MLT – CIMB
Fully valued
• Downgrade to Neutral from Outperform. The outlook for the manufacturing and logistics industries remains weak and we expect new demand for logistics space to ease further. Nonetheless, MLT’s long weighted average lease to expiry of five years and geographical diversification should ensure visible income over the medium term. Occupancy of 98% as at Mar 09 remained materially higher than the islandwide warehouse occupancy rate of 92.8%.
• Lacking catalysts in the short term. MLT’s strategy of growth via acquisitions looks set to take a backseat in the short term, while upward rental reversions are limited by weak demand.
• DDM-derived target price raised to S$0.62 (from S$0.60). We maintain our estimates but use a lower discount rate of 9.4% (from 9.6%) based on a lower riskfree rate of 4.8% applied across our REIT universe. P/BV for MLT has risen to 0.6x, in line with the sector average. At this level, we believe MLT is fully valued, and downgrade it to Neutral.
FCT – CIMB
Suburban malls to stay resilient
• Maintain Outperform. Our site visits to FCT’s three properties show occupancy and traffic count remaining high. Only finishing touches to asset enhancement works for North Point are left, with most of the tenants in the fitting-out stage now. Retail space is 94% committed despite expectations of weak retail sales growth, while renewed rents and new leases in Northpoint were up 14% in 1H09.
• Outlook for FCT’s properties remains positive. Despite a negative macro environment, we believe that suburban retail malls such as FCT’s will be resilient with no significant new supply in the suburbs, limited lease expiries in 2009 and stepped-up rents incorporated in 86% of its leases.
• Changes in estimates. We increase our occupancy estimate for North Point to 85% from 70% in view of full occupancy from 2H09; and rental growth assumptions across the portfolio to 3% in FY11 from 2%, on expectations of improved economic conditions.
• DDM-derived target price of S$1.12 (from S$1.06). Our DPU estimates increase by 5-5.6% for FY09-11. We also use a lower discount rate of 9.2% from 9.4% earlier with the application of a lower risk-free rate of 4.8% across our REIT universe. Our DDM-derived target price rises accordingly to S$1.12.