Author: tfwee
FCOT – Phillip
Strategic review takes a twist. The new management has decided to ditch the divestment plan of the Australian assets. Previous asset enhancement projects at Keypoint and China Square Central were put on hold. It has also dropped plans for a hotel development at China Square Central with a view of rising construction cost and lower tourist arrivals. It will instead focus on recapitalizing the balance sheet and active asset management to retain tenants and maximizes lease renewals.
No catalyst in sight. Fraser Commercial Trust (FCOT) faces significant headwind and sees some pressing issues it needs to address.
Key issue 1: Asset revaluation a risk to breaching gearing limit. FCOT latest valuation of its properties recorded an S$126.2million (-6.6%) loss to its asset value. NAV per unit is cut from $1.39 to 1.21. We see further risk in cap rate expansion resulting in lower property values, which might increase the gearing ratio. It has one of the highest gearing ratio among the SREIT. FCOT current gearing is 48.6%. We think it is stuck in a difficult position to reduce the gearing, as the plausible ways are not favorable. Judging by the strategic review outcome, an asset sale was already ruled out. An equity fund raising (EFR) might not be able to raise the expected amount due to the weak equity market climate. At the current price level, a pure EFR would be highly dilutive as well.
Key issue 2: FCOT has S$70 million debt due on 22nd Nov 2008. This is supposed to be repaid with the redemption proceeds from AWPF, however management has mentioned there will be no redemption. We believe FCOT should be able to secure refinancing given its sponsor relationship. However we have also assumed a higher interest margin along with the refinancing.
Valuation and recommendation. FCOT is trading at approximately 80% discount to its NAV. Although cheap on a relative basis, we are of the view that sentiments may not pick up in the short term. Our concern stem from the following points; 1) high gearing ratio, 2) probable dilution from EFR, 3) high borrowing cost, 4) worsening rental outlook and asset value. We are downgrading our call to Hold with a fair value of $0.21.
CitySpring – OCBC
2Q09 cash earnings hit by timing lags and one-offs
Cash earnings hit in 2Q09. CitySpring Infrastructure Trust (CitySpring) posted a 31.7% YoY gain in 2Q09 revenue to almost S$101m, and a net loss of S$36.7m, largely due to non-cash items such as fair value losses and depreciation charges. To track CitySpring’s performance, we typically look to cash earnings, which came in at S$1.1m, or 90.2% lower than the trust had projected in its January unitholders circular. In contrast, the trust had earned S$14.1m in 2Q08 and S$17.7m in 1Q09.
Timing lags and one-offs. The biggest hit to cash earnings came from the payment of a one-time upfront fee of S$7.8m for the recently secured S$370m loan. We estimate another S$4m hit is due to a timing lag between tariffs (which are adjusted quarterly) and actual fuel costs at City Gas. City Gas expects to recoup the under-recovered fuel costs in 3Q09. Lower facility fees, which will be partially recouped, and S$2.5m in negative CRSM payments at Basslink also impacted cash earnings. The trust will maintain its 1.75 S cents quarterly payout by utilizing retained cash. CitySpring estimates its accumulated cash surplus as at 30 Sept is about 3.7x the current quarterly distribution – a nice cushion against any further one-offs or lags.
Same investment case. The investment case for CitySpring is unchanged – its strong sponsor (Temasek) and its basket of defensive assets. The trust’s assets feature (1) a monopolistic market position or strategic consideration; (2) fairly stable and predictable cash flows that are fairly non-cyclical; (3) CPI-linked revenue escalations that act as a hedge against inflation or regulator-controlled returns; (4) fairly inelastic demand or availability-based revenues; and (5) a long investment horizon. The noncyclical nature of CitySpring’s cash flows is also a major differentiator against other yield plays like shipping trusts and REITs who have run into industry downturns.
Same concerns. Our concerns have been accentuated, rather than assuaged, by the 28% decline in CitySpring’s share price since our last report. Basslink, CitySpring’s S$1.5bn acquisition, is currently 100% debt financed. This approach allowed the trust to bypass shaky equity markets but it is not a sustainable or permanent solution in our view. Additionally, we feel CitySpring’s current portfolio lacks critical mass and should grow through further acquisitions. An equity cash call would be a necessary next step – but it would be highly dilutive at current price levels. We retain our HOLD rating with new fair value of S$0.57 (previously S$0.80). We have also adjusted our earnings estimates to reflect a weaker AUD.
AREIT – BT
Ascendas-Reit allays fears over TT International
Tenant has placed security deposit of 11.4 months rent, it says
ASCENDAS-REIT (A-Reit) has come out to reassure investors that its tenants are not in breach of rental obligations.
Reit manager Ascendas Funds Management said yesterday that tenant TT International placed a security deposit equivalent to 11.4 months’ rent, or $6.86 million. ‘If the tenant should default on its rental or lease obligations, this security deposit could be used to offset any potential negative impact on A-Reit’s financial results in the near term,’ it said.
The announcement was made after TT International said recently it was in default on certain fixed-rate notes and would seek a halt on repaying money owed to its principal bankers and all unsecured creditors.
TT International Tradepark (TTIT), a subsidiary of TT International, rents a six-storey warehouse and adjacent 10-storey office building from A-Reit, near Jurong East MRT.
With a net lettable area of 42,765 square metres, the property accounts for 2.3 per cent of A-Reit’s total net lettable space.
TTIT has a 10-year lease from March 2004 and accounted for 1.8 per cent of A-Reit’s total gross monthly revenue at Sept 30. TTIT’s current rent is $1.30 per sq ft per month.
The real estate investment trust manager said: ‘At this juncture, TTIT is not in arrears on its rental obligation.’
A-Reit has 88 properties in Singapore. Fifty-two of these are sale-and-leaseback properties, which A-Reit says have security deposits of 8-15 months. The weighted average time to expiry for the 52 properties is 7.8 years and none of them is up for renewal until the second half of FY2009/10.
An A-Reit spokeswoman said 80 per cent of A-Reit’s total rental income is paid by Giro, so defaults if any can be managed quickly. She said this is not an issue at present.
A-Reit has more than 860 international and local companies as tenants. Major tenants include SingTel, C&P Logistics, Siemens, TT International, Honeywell, Zuellig Pharma, LFD (Singapore), OSIM International, Venture Corporation, Federal Express, Freight Links Express, Johnson & Johnson, RSH, Infineon Technologies, Procter & Gamble and Hyflux.
HWT – DBS
Decent set of results
Story: Excluding an unrealized forex gain of S$1.76m (owing to the appreciation of RMB against SGD), 3Q08 results were largely in line with our expectations, with distributable cash generation of 1.33 Scents –accounting for 48% of 2H08 projected DPU. Management remains confident of meeting the 4.88 Scents DPU payout target for FY09 (after waiver by sponsor Hyflux).
Point: 3Q08 revenues declined 17% q-o-q to S$13.9m, owing to lower construction revenue of S$10m compared to S$13.3m in 2Q08, as fewer project milestones were reached. The Beichen and Zunhua projects have been delayed and will now be completed in 4Q08 and 1H09, respectively. Tariff receipts grew 23% q-o-q to S$4.7m, though volumes grew by only 1% and utilization rates actually fell to 59% from 63% in 2Q as new plants came into play. Thus, much of the growth in tariff receipts can be attributed to tariff revisions negotiated at existing plants. Operating costs were again well managed, and operating margins held up at 60%, compared to 58% in 1H08 and higher than our initial FY08 projection of 45%. Cash balances at the end of the period stood at S$37.5m, down S$13m over the period owing to payment for construction costs and 1H08 dividend payout of S$4.45m.
Relevance: We revise our DPU forecasts for FY08 and FY09 up by 4.5% and 13%, respectively to account for the better visibility in sustenance of margins. The proposed first phase of asset acquisition from Hyflux will bolster the DPU from FY10 onwards. Maintain BUY, at a revised target price of S$0.62, based on our blended valuation methodology. Key risks include delays in future acquisitions if the credit markets remain tight, and a slower ramp up in utilization rates in industrial areas in the wake of a perceived slowdown in export oriented industries in China.