Author: tfwee
FSL – DBS
Lower risk, higher returns
• Counterparty risks waning, no big refinancing risks before 2012
• Healthy uptake of units in distribution reinvestment scheme signals investor faith in management
• Valuations look more compelling than peers
• Upgrade to BUY, TP revised up to S$0.71
Risks look more manageable now. FSLT has a more diversified fleet than peers – with about 38% exposure to containers and 65% to tankers (oil, chemical, product). With the oil price in recovery mode, counterparty risk is reduced as well. Berlian Laju Tankers, one of its more vulnerable clients, should be able to tackle its balance sheet difficulties with recent bond and rights offerings. Moreover, FSLT has no big refinancing risks before 2012.
Conservative approach seems to be working. Though the sponsor and key management lent only about 9% support to the 1Q09 Distribution Re-investment Scheme (“DRS”), the uptake rate of 30.9% announced recently was surprisingly high – and seems to vindicate the management’s prudent approach to cash distributions. FSLT will now issue about 15.6m new shares and save US$3.8m in cash. With a dividend cut earlier and the DRS now, FSLT is looking to prepay borrowings and build a better negotiating platform with lenders, should the need arise.
DPU guidance inspires confidence. As such, given the lack of near-term concerns, we believe there is better visibility to FSLT’s dividend payouts, but it is still trading at yields of about 25% – higher than other shipping trusts. Management has also re-affirmed 2Q09 DPU guidance of 2.45UScts. This is despite the higher number of units, indicating that the DRS scheme may not be dilutive in the near-term. Hence, we upgrade the stock to BUY; and our DDM-based TP is revised up to S$0.71.
CMT – CIMB
Flat yields
• Islandwide retail occupancy down marginally. Occupancy of islandwide retail space at 93.4% was down marginally from 93.8% in 4Q08. Retail occupancy in the Orchard and Outside Central areas stayed above islandwide levels.
• Checking out the competition. We visited three of CMT’s competitors recently and conclude that CMT’s malls should be able to stay resilient despite the competition.
• Upgrading our estimates. We are now more positive that the healthy business in CMT’s suburban malls will provide support to rental levels. We change our rent assumptions for most of CMT’s malls to moderate growth of 3-5% for 2010-11, from declines of 5-10%. We also adjust for the number of units in 2009 after the rights issue. Our 2009 DPU estimate drops by 8% while our 2010-11 estimates rise by 12- 25%. Following our changes, our new DDM-derived target price is S$1.26, up from S$0.87 (unchanged discount rate of 9.7%)
• But maintain Underperform. Compared with its peers in the SREIT space, CMT appears fairly expensive at 0.86x P/BV and yields of 6% vs. the sector average of 10.2%. Since its last low of S$1.16 on 28 April, CMT’s share price has appreciated 23.3%. This would be an opportune time to exit a stock with flat yields and a lack of catalysts in the medium term. Maintain Underperform.
KREIT – UOBKH
Lower Gearing, Higher Upside
We visited K-REIT Asia (K-REIT) and key highlights from the meeting are as follows:
Credit crunch has abated. Availability of funding via bank loans has improved significantly. There is a slight improvement in the credit spread that banks charge, although the quantum is not obvious in management’s opinion. Management sees an advantage in the longer tenures of 5-7 years provided by commercial mortgage-backed securities (CMBS). Cost of borrowings for long-dated CMBS is not as prohibitive, compared with bank loans, as the yield curve is not as steep. K-REIT has a S$190m CMBS that matures in May 2011.
Conservative in valuing assets. K-REIT revalues its investment properties once a year and the next valuation will be conducted in Dec 09. The company has been conservative in valuing its assets and usually marks prices to the lower end of the market range. It values Prudential Tower at S$2,066psf, Keppel & GE Towers at S$1,347psf, Bugis Junction Towers at S$1,265psf and One Raffles Quay at S$2,213psf. The risk of severe markdowns in asset values is quite low, especially given the recent rebound in transaction prices for strata office space.
K-REIT has the lowest gearing of 27.6% among office REITs (CapitaCommercial Trust: 30.7% post-rights issue, Suntec REIT: 34.4%). Financial risk is low as the next refinancing is an unsecured floating rate loan of S$391m from Keppel Corporation due Mar 2011. Maintain BUY with target price at S$1.16, based on a dividend discount model (required rate of return: 7.7%, growth: 2.5%).
PLife – CIMB
On the road
• PLife non-deal roadshow. We brought PLife REIT on a non-deal roadshow to Singapore, Kuala Lumpur and Hong Kong recently. Management elaborated on its acquisition rationale and strategies, and clarified on tenant concentration risks from Parkway Holdings.
• Acquisition rationale and strategies. Whilst short term acquisitions are likely to remain opportunistic in nature, medium term targets will focus on low-risk countries with quality healthcare assets and transparency in government regulations. The 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, the management intends to cut down concentration risks from PWAY to 60%.
• Potential acquisitions to be a kicker. An acquisition within the year looks increasingly likely. PLife’s trading yields have been compressed to 7.9%. 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. Maintain Outperform with unchanged target price of S$1.20 (discount rate 8.1%)
FSL – BT
31% opt for new units in place of cash: FSL Trust
FSL Trust Management Pte Ltd (FSLTM), the trustee-manager of First Ship Lease Trust (FSL Trust), yesterday said its distribution reinvestment scheme (DRS) has received stronger than expected support from unitholders. It also affirmed its distribution forecast for the current quarter.
Unitholders holding 155,540,770 units or 30.9 per cent of the total number of issued FSL Trust units elected to receive their distributions in the form of new units in lieu of 2.45 US cents per unit in cash. Accordingly, FSLTM has issued 15.6 million new units and the units have been credited into the CDP securities account of these unitholders on May 29, 2009.
FSL Trust’s sponsor FSLTM and the respective board directors also opted for new units in respect for all or part of their unitholdings.
FSLTM chief executive Philip Clausius said: ‘The participation level in the DRS was much stronger than we expected and we are certainly very pleased with the outcome. That so many unitholders chose to receive their distribution in new units is a testament of their confidence in the stability and long-term prospects of FSL Trust.’
With the scheme, a total of US$3.8 million has been retained and this will go mainly to voluntary debt repayment.
FSLTM reaffirmed its distribution per unit (DPU) guidance of 2.45 US cents for the quarter ending June 30, 2009. This represents about 75 per cent of the projected distributable cash flow. The residual cash from the distributable cash flow, together with the US$3.8 million retained under the DRS, will be applied towards a voluntary loan prepayment of US$8 million on the next interest reset date.
All of FSL Trust’s eight lessees have been making full and prompt advance payment of their monthly lease rentals, including those for June 2009. ‘FSL Trust has no committed capital expenditure and no immediate need for substantial capital raising to support its current lease portfolio,’ it said.