Author: tfwee
HWT – CS
Second asset injection approved by unit holders
● We recently met HWT’s management on its second asset injection, which was passed at its EGM on 16 December.
● With a total purchase price of S$89.7 mn, the five new plants would boost the total capacity by 38% to 580,000 cu m/day. In the circular, management released a more conservative set of projected volume than the initial portfolio presented, in our view. Interest rate was lower with the interest rate swap. With a guided incremental DPU of 0.16 Scts, this brings FY09 DPU to 5.42 Scts.
● We raised our net profit forecasts by 3-65% (from a small base) over next three years to mainly reflect lower opex, lower net interest expense and FX gain, partly offset by lower volumes.
● More importantly, due to higher-than-expected adjustments (-FX gain and -other adj) to distributable income, we lowered our DPU estimates by 3-8%. Our resulting DDM-based target price is S$0.60 (from S$0.74) based on 10% WACC and 5% terminal growth rate (from 6%). The stock remains an attractive yield play, offering 13-15% yield within the water sector and Singapore market.
CMT – MS
Relatively Less Attractive, Better Yield Elsewhere
Better Yield Elsewhere: Maintaining our Equal-weight rating on CapitaMall Trust, we have a new lower price target of S$1.52 (from S$2.05). The lower price target reflects our lower rental assumptions for CMT as well as attempts to capture the risk of our bear case panning out as the macro environment remains fragile. Assigning a 20% probability that our bear case may pan out, we have a new price target of S$1.52 for CMT versus the S$1.66 suggested by our base case DCF-driven NAV. While we like CMT’s relatively defensive suburban retail asset portfolio, we find CapitaCommercial Trust (CACT.SI, EW, S$0.81), our new sector top pick’s risk reward more compelling, offering a higher DPU yield of 14.5% and 13.6% for FY09-2010F versus CMT’s 8.7-8.3% DPU yields.
Suburban retail relatively safer but not immune: Suburban malls constitute 46-49% of CMT’s total asset value and net property income, which are relatively more defensive, as suburban malls are less dependent on tourism and consumer discretionary spending, which has been on a downtrend. Given that management will be putting on hold its asset enhancement plans for Funan Digital Mall, Tampines Mall, Jurong Entertainment Centre and Raffles City’s Phase 3 works due to the current market uncertainties, as management is in cash preservation mode, a number of its assets remain undervalued.
Sector dependent on macro recovery: The market is likely to remain skeptical on the viability of the S-REIT business model given its heavy reliance on credit and will be keeping a watch on the ability and cost of the S-REIT debt refinancing in 2009. For now, we believe S-REITs are likely to trade in line with the STI Index.
Suntec – MS
Back to Basics
Higher yield required as less superior to CCT: We are maintaining our Equal-weight rating on Suntec REIT on a lower price target of S$0.68 (from S$0.91). In addition to reducing our rental assumptions for its assets, our new price target attempts to capture the risk of our bear case scenario panning out, as the macro environment continues to deteriorate, by assigning a 20% probability to our bear case. A base case DCF-driven NAV suggest a value of S$0.77 for Suntec, on a fully diluted basis. In our view, the risk-reward offered by CapitaCommercial Trust, our new sector top pick with 14.5%-13.6% DPU yield, is more attractive than Suntec’s 13.3%-13.5% yield. We prefer CCT’s higher-quality asset portfolio, leasing track record and balance sheet, backed by its strong parent, CapitaLand.
Too early to ascertain refinancing risk, as its S$700m debt refinancing is only due in December 2009. According to management, banks remain keen to work with Suntec on its refinancing but are reluctant to commit to funding rates ahead of time. On a positive note, our economics team is currently expecting SIBOR to be 0.6% by 2009 year-end and 2.1% by 2010 year-end. If rates remain below 1% in 2009, this would be positive for S-REITs as further increases in required spreads from the current 200-250bp would be cushioned by the lower SIBOR or swap rates. At a current leverage of 33%, Suntec has room to absorb a 200bp to 320bp cap rate expansion before it hits the 50% and 60% marks. This translates to a 35% to 46% devaluation in its asset portfolio respectively. We believe this buffer is sufficient for the next 12 months at least.
Sector dependent on macro recovery: The market is likely to remain skeptical on the viability of the S-REIT business model given its heavy reliance on credit and will be keeping a watch on the ability and cost of the S-REIT debt refinancing in 2009. For now, we believe S-REITs are likely to trade in line with the STI Index.
MapleTree – BT
Moody’s Investors Service on Monday affirmed MapletreeLog’s Baa2 rating and changed the outlook to stable from negative.
‘The affirmation of Mapletree’s Baa2 rating reflects a significant improvement in the group’s leverage and liquidity position following a rights offering that is largely supported by its sponsor, MapletreeInvestments Pte Ltd,’ says Kathleen Lee, a Moody’s VP/Senior Analyst.
She added ‘such that its financial metrics — Debt/EBITDA of around 8x and EBITDA/Interest around 3.5x — are more appropriate for its Baa2 rating’.
‘In addition, MapletreeLog has successfully alleviated material refinancing risk with the use of its rights proceeds from August partly paying down short term debt and committed acquisition payments as well as extending some short term debt to medium term bank lines’ says Ms Lee.
Mapletree Logistics Trusts was the first Singapore-based Asia-focused logistics REIT. It was listed on the Singapore Stock Exchange in July, 2005, and its portfolio has since increased from 15 to 79 properties by 30 September 2008, and valued at approximately S$2.67 billion. Including its recently acquired assets, MapletreeLog has a fairly well diversified portfolio with 54% of its investment assets in Singapore, followed by Hong Kong (24%), Japan (12%), Malaysia (5%), China (4%) and South Korea (1%).
Going forward, Moody’s expects MapletreeLog to observe financial metrics similar to those they now have and to be relatively measured in looking at new acquisitions. Even if they were to acquire new assets the company would look to have committed funding before committing to new asset acquisitions and maintain a well-laddered debt maturity profile.
The stable rating outlook reflects Moody’s expectation that the expected weakness in the industrial property market over the next 12-18 months is manageable within the rating considering MapletreeLog’s asset quality and its improved financial metrics.
On the other hand, Moody’s does not see an upside rating potential in the next 12-18 months given the expected weakness in the operatingenvironment and property fundamentals.
On the other hand, Baa2 rating could be downgraded if MapletreeLog’sfinancial performance weakens due to a material weakening in the industrial operating environment beyond that expected.
Financial indicators that could pressure the rating include: fixed interest coverage dropping below 2-3x or Debt/EBITDA coverage ratio increasing above 8x — 10x. In addition negative rating pressure could emerge if the company does not continue to proactively extend its debt maturities to avoid any short term pressures in this context.
The last rating action was on 10 April, 2008 when the rating of MapletreeLog was confirmed at Baa2 with outlook negative.
Suntec – OCBC
Looking oversold
Focus on rentals and capital values. Suntec REIT (Suntec) will see almost 70% of its office portfolio ex One Raffles Quay up for renewal in the next two years. We are projecting Suntec City office rentals will tumble down to single digit next year. We also expect vacancy rates to be on the rise. We estimate the average passing rent at Suntec City Office is currently in the S$6.50 ballpark, comfortably below our fairly bleak reversionary rent expectations for the next two years. On the retail side, we have priced in a conservative 8-10% per annum decline in Suntec City Mall rentals over the next two years. We also feel capital values are at risk, especially for the REIT’s office portfolio. Suntec’s properties were revalued on 30th September, yielding a marginal surplus. According to management, implied cap rates were up 25 basis points (bps) from last year – which still feels a little low to us.
Some refinancing risk. Suntec has about S$825m of debt, or about 40% of its total borrowings, up for refinancing in the next 12 months. Its cost of debt is likely to increase from the last reported all-in cost of 3.2%. The REIT is currently leveraged at 0.32x debt-to-assets. We expect (non-cash) revaluation losses going forwards, which could potentially stress the REIT’s tolerance for gearing. We believe our valuation reflects the risk of an equity recapitalization (which is not necessary, but possible).
Looking oversold. We still think Suntec’s assets are a good long-term bet, and will be net beneficiaries of the revitalization of the Marina area and the completion of the Circle line. We have only two concerns with the REIT: historians will likely label the One Raffles Quay buy in 2007 as overexuberant; and the deferred equity payment structure on the IPO assets creates unnecessary stress on DPU in what are looking to be testing times. Still, our primary focus is on valuations – which are looking oversold. Value hunters have an opportunity to pick up some really good assets on the cheap, in our view. Back of the envelope, the current share price seems to be implying a 48% decline in capital values. We think our concerns have been more than priced in at this point. Our RNAV estimate of S$1.05 prices in a 38% decline in asset values. Our fair value estimate for Suntec is 90 S cents, at a 15% discount to our RNAV estimate. Maintain BUY.