Author: tfwee
MLT – OCBC
A flat, but better than expected, 1Q09
Fairly flat QoQ. Mapletree Logistics Trust (MLT) posted S$53.3m in 1Q09 revenue, up 24.9% YoY, thanks to acquisitions. Revenue was fairly flat on a sequential basis, up only 1.7% QoQ. NPI margin stood at 86.7% for the quarter, slipping from the 87.6% margin achieved a year ago but slightly better than the 86.1% recorded in 4Q08. Distributable income rose 0.7% QoQ and 36.1% YoY to S$28.6m. MLT will pay out 1.47 S cents/unit, down 22.6% YoY (because of an enlarged units base post last year’s rights issue) and up 0.7% QoQ. This translates to an annualized yield of 13.1%. The manager reaffirmed its commitment to pay out 100% of distributable income.
But better than expected. 1Q results outperformed our expectations by 5-8% due to our conservative occupancy assumptions for FY09. Our estimates incorporate a fairly bearish 90% portfolio-wide occupancy assumption over FY09-10. MLT’s overall occupancy as at 31st March is 98.5%, versus 99.6% as at 31 December. Some pockets of weakness have emerged: Hong Kong occupancy has fallen from 98.2% as at December to 95.8% at March, while China occupancy has fallen from 99.2% to 91.7%. Note that the China fall is because of problems with one tenant (contributes less than 1% of total revenue). At the same time, other markets like South Korea, Japan and Malaysia are holding at 100% occupancy. This variety in performance explains the small size of the overall dip, and validates the portfolio’s advantages of geographical diversification and balance between multi-tenanted and sale-and-leaseback properties.
Refinancing underway. MLT is geared at about 38.3% debt-to-assets. During the quarter, MLT raised some S$105m in new loans to refinance existing debt. As of 31 March, about S$151m in loans will mature this year, and the manager announced significant progress in arranging refinancing. While a US$20m term loan is still being negotiated, MLT has enough committed lines and cash on hand to refinance all 2009 loans.
Valuation achieved. We believe our investment thesis still stands: occupancy will be the key performance driver in the industrial space; but MLT’s diversified and high quality portfolio will allow it to deliver reasonably stable income to unitholders over the next two years. MLT has had a good run, up 15.4% since our re-initiation in February. However, we have not seen enough corresponding positive signals for the industrial market. As our fair value estimate of S$0.45 has been achieved, we are downgrading the stock to a HOLD.
PST – OCBC
DPU up 5.4% QoQ, CSAV in focus
DPU up 5.4% QoQ. Pacific Shipping Trust (PST) posted a significant 72% YoY increase in 1Q09 revenue to US$15.2m, due to contributions from the four vessels acquired last year. This is the first quarter recording full contributions from all four vessels and 1Q revenue rose 4.9% QoQ. Cash earnings (net profit adjusted for non-cash items such as depreciation) rose 63% YoY and 4.8% QoQ to US$10.8m. The trust will pay out 0.98 US cents per unit, up 5.4% QoQ and 1% YoY. The small YoY increase in per share figures is due to the enlarged unitholder base after last year’s preferential offering. The results were in line with our expectations.
CSAV renegotiation in focus… As announced last week, PST customer CSAV is asking ship owners (including PST) for a temporary reduction in charter hire payments. Two PST vessels are chartered to CSAV on 5-year time charters. We expect PST to agree to this renegotiation request as this is probably the best option PST has in the current environment. Discussions are still in preliminary stages but details are thin on: 1) whether the various ship owners will all agree to the request; 2) the exact quantum of the discount; 3) the size and type of compensation granted to owners.
…making lenders a concern. Despite wide-spread issues in the ship financing arena, PST had so far managed to escape ‘lender overhang’ due to its fairly conservative business model; a fortuitous equity issue last year that strengthened its balance sheet; and importantly – the lack of loan-to-value covenants on its books. But the CSAV issue tilts the balance of power, in our view: a renegotiation likely qualifies as ‘material change’ in the trust’s circumstances. PST’s lenders could conceivably tack on a punitive spread to PST’s cost of debt (increasing interest expense) or demand higher debt repayments. We understand that PST’s lenders are reserving judgment for the moment, with no explicit renegotiation proposal out yet.
Valuation. We think it is too early to turn buyers of shipping trusts – we would prefer to wait until the shipping markets show concrete signs of stabilizing. For PST, significant uncertainty remains on the CSAV front. We also see a possibility that PST’s board takes an even more prudent stance on distributions in the coming quarters in response to recent events. Counterparty risk (both CSAV and PIL), and lender reaction, remains our key concern, which we think is adequately reflected in our US$0.16 fair value estimate. Maintain HOLD.
MLT – DBS
Attractive valuations, stable yields
At a glance
• Results were in line with our estimates, above consensus
• Portfolio occupancy remained relatively robust
• Minimal refinancing risk
• Maintain BUY, TP $0.56 based on DCF
Comment on Results
In line with expectations. Gross revenues and net property income grew by 25% to S$53m and S$46m respectively as a result of a larger portfolio. Distributable income improved by 36% to S$28.6m, translating to a DPU of 1.47 Scts. When compared against 4Q08 performance, incomes remained relatively stable.
Portfolio occupancy remained high at 98.5%. Key operating markets remained relatively stable. Slight decline from 4Q08 (99.6%) as a result of MLT taking back a property in China. However, impact on earnings is expected to be within 1% of income and within our projections of a 5% increase in vacancy levels by end FY09. We believe that upside surprise will derive from the trust managing to retain current occupancies for the rest of FY09. As of 1Q09, in excess of 80% of FY08 revenues have been secured till date.
Minimal refinancing risk. MLT has secured sufficient resources to meet its 2009 debt obligations. We remain confident on its financial position given (i) an unsecured loan portfolio leading to no LTV pressures, (ii) ample interest cover expected to remain above 4.0x, and (iii) strong parentage & relationships with bankers.
Recommendation
Attractive valuations. We believe that MLT, trading at 0.5x P/BV, coupled with a prospective forward DPU yield of 12% is attractive. We maintain our BUY call on MLT, TP adjusted to S$0.56, on the back of lower equity risk premium assumptions.
FCT – DBS
Steady Yield
At a glance
• Results in line. DPU rose 6.3% yoy due to organic rental growth and higher distribution income payout of 95%
• Higher rental renewals supported by increased shopper traffic and high average portfolio occupancy of 93.4%
• Northpoint AEI on track with high lease pre-commitments and a 20% expansion in average rental rates. This will underpin forward earnings growth
• Maintain BUY, TP $0.81
Comment on Results
Results in line with street estimates. Gross revenue remained stable at S$21.1m (-2% yoy, +8% qoq) on higher portfolio occupancy of 93.4% and positive rental reversions, averaging +7.3% over pcp. NPI grew 2% yoy (+15% qoq) to S$14.7m, lifted by better expense ratio of 30%. Distribution income increased 7.3% yoy to $11.6m (DPU: 1.86cts), thanks to improved operating performance and a higher dividend payout of 95% (vs 90% in 2Q08). As at 2Q09, gearing remains healthy at 30% and interest cover at 4.6x.
Positive DPU Cagr over FY09/11. Despite challenging conditions, DPU is expected to grow by a 4% Cagr over the next 3 years. To date, FCT has locked in 96% of its FY08 gross rental income and has a small 2.5% and 12% of NLA to be renewed in FY09-FY10. Full impact of higher income from Northpoint AEI will be felt from FY10. The makeover, completing mid 09, has enabled the group to tie in 20% higher rentals and boost property NPI by 30%.
Recommendation
Maintain BUY, TP $0.81. We like FCT for its exposure to the suburban retail sector. Earnings resilience derived from a welllocated portfolio catering largely to necessity shopping. In addition, successful enhancement initiatives at Northpoint would lead to a positive 4% DPU Cagr over the next 3 years while healthy balance sheet and little near term refinancing need would mitigate any need for a dilutive fund raising exercise. At current price, FCT offers a potential total return of 25%. Maintain Buy.
FirstREIT – BT
First Reit Q1 distributable income up 2.5%
INDICATING the resilience of the healthcare sector amid hard times, First Reit emerged from its first quarter in positive territory.
Singapore’s first healthcare real estate investment trust posted a 2.5 per cent year-on-year climb in distributable income to $5.2 million and a 1.6 per cent rise in distribution per unit (DPU) to 1.88 cents.
‘Based on its annualised DPU of 7.62 cents and the closing price of 56 cents on April 21, First Reit achieved a distribution yield of 13.6 per cent,’ said First Reit. This compares with 10.9 per cent in Q1 2008.
Although gross revenue increased 0.4 per cent to $7.4 million, net property income dipped 0.1 per cent to $7.3 million as a result of the commencement of capital expenditure provision of about $31,000 for repair and replacement works for four Indonesian properties, said First Reit.
Despite the current economic situation and challenges faced by many Reits in refinancing, First Reit recently secured a three-year $70 million multi-currency transferrable term loan facility (MCTLF) from OCBC.
This will be used to refinance First Reit’s outstanding bank loans of $50.8 million, with the balance for funding the redevelopment of Adam Road Hospital and possible future asset acquisitions.
Although interest rate is higher for this MCTLF, the term loan facility will provide First Reit with greater flexibility to improve its income generating capacity via further asset enhancements and working with its tenants to continually upgrade services.
Looking ahead, First Reit does not expect its performance to be significantly affected by the current economic situation due to its resilient trust structure which is firmly grounded by long-term leases with stable rentals in Singapore dollars with no currency risks and downward revisions.
First Reit’s CEO Ronnie Tan said: ‘Healthcare services are to a certain extent, recession-proof, as patients continue to seek medical care whether in good or bad times. Our hospitals in Indonesia continue to grow at double digit rates for 2008 despite the financial crisis. We believe this positive trend will benefit us.’