Author: tfwee
CDLHTrust – CIMB
Vulnerable in volatile times
• Downgrade to Underperform from Neutral. CDHLT is the largest hotel owner in Singapore by number of rooms. The global economic slowdown is negative for the short-stay hospitality sector which is traditionally vulnerable. Despite long master lease structures for its hotel assets, the minimum rent component for its initial four assets acquired at listing and Hotel Rendezvous in New Zealand only contribute a third of our gross revenue forecast for FY08. This subjects CDLHT’s gross revenue to a large degree of uncertainty. Slowing visitor arrivals in September despite the well-publicised F1 event is in line with our house view that the US financial crisis could result in a marked slowdown in Asia. Earlier, we had cut our REVPAR forecasts by 10-20% and removed our acquisition assumptions for FY09-10. The sole saving grace for CDLHT is its low asset leverage of 18.2%, which gives it ample financial flexibility.
• Unchanged DDM-derived target price of S$0.77 (discount rate 10.8%). A recent short rally has brought CDLHT’s share price close to our target price of S$0.77. Downgrade to Underperform from Neutral on valuation grounds.
CMT – CIMB
Still pricey
• Maintain Underperform. CMT has good exposure to retail malls in suburban Singapore as well as the downtown core of Singapore which are traditionally resilient to economic slowdowns. Nonetheless, strong upcoming supply in the central area, slowing visitor arrivals and a global economic slowdown are likely to hurt the retail business, particularly in the Orchard Road precinct. The ability to increase rents through asset enhancements may weaken on these accounts, although we are not expecting CMT’s occupancy levels to weaken substantially from current near-full levels. On the other hand, the decision to continue with the integration of Plaza Singapura and Atrium@Orchard may result in much higher capital expenditure, affecting CMT’s free cash flows.
• Unchanged DDM-derived target price of S$1.90 (discount rate 9.7%). CMT’s P/BV of 0.9x with forward yields of 6.9% still makes it expensive compared with its closest peer, FCT’s 0.59x with yields of 10.1%. Maintain Underperform in view of a weakening macroeconomic outlook.
CCT – CIMB
Rising from the ashes
• Top pick in commercial sector, upgrade to Outperform from Underperform. CCT is the largest REIT office landlord with almost 3.5m sf of commercial space. Even with asset devaluation, the likelihood of breaching impairment levels is limited. To reach impairment, CCT’s assets would have to be devalued by 40% over a single year. Assuming a 20% devaluation, CCT would still remain within 45% gearing, which is the optimal level. With management’s track record in past refinancing and access to debt markets, as well as support from sponsor CapitaLand, we believe that it should be able to secure refinancing.
• Concerns already priced in. We have priced in occupancy levels falling to the last crisis levels but with moderate rental declines in view of CCT’s resilient income from 5-year minimum income support for One George Street, long leases for HSBC Building and a stable retail segment in Raffles City. We also increased our cost of debt to 5%, 140bp above its current all-in cost of debt of 3.6%. Despite this, forward yields for CCT remain attractive at 11% for a portfolio of its quality.
• Unchanged DDM-derived target price of S$1.17 (discount rate 10.4%). At our target price of S$1.17, CCT has potential price upside of 30%, vs. the potential 15% upside for the STI. We upgrade CCT to Outperform from Underperform based on valuation. The sharp fall in its share price has more than compensated for various concerns, in our opinion. Early success in securing refinancing before Mar 09 may provide a catalyst for the stock. At 0.29x price to NAV, CCT is the second-lowest valued REIT after FCOT (0.21x). We believe this is an opportune time to accumulate the stock at such attractive levels.
Cambridge – CIMB
Worth a chance
• Maintain Outperform. We expect new demand for industrial space to ebb in tandem with an expected economic downturn. CCT has a small asset size with tenant concentration risk, unlike its much larger peers, A-REIT and MLT. Nonetheless, we expect its rental income to stay visible in the medium term with all its tenants on long leaseback arrangements with built-in rent increases. Management is working on the refinancing of significant short-term debt that would be due by Feb 09 and early closure could provide catalysts in the short term.
• Unchanged DDM-derived target price of S$0.52 (discount rate 9.6%). Despite our earlier increase in cost-of-debt assumptions, forward dividend yield in FY09 remains attractive at 17.3% due to overselling of the stock. CIT remains the cheapest industrial REIT under our coverage, with a P/BV of 0.36x and forward yields of 17.3%. S-REITs are trading at 0.51x P/BV and forward yields of 13.6% on average. We remain positive on the resilience of the industrial sector, anchored by a long weighted average remaining lease term of 5.9 years in CIT’s case. Maintain Outperform.
ART – CIMB
Changing seasons
• Maintain Underperform. ART’s 9M08 earnings performance had been good. However, management guides that the fourth quarter is typically the weakest. REVPAU in China which had surged during the Olympics Games is likely to normalise. The global economic downturn would have a material impact on international travel and the outlook looks bleak even for the serviced apartment industry.
• RevPAU cut by up to 20%. In line with our house view that the US financial crisis could result in a marked slowdown in Asia, we recently cut our REVPAU forecasts (a function of occupancy and average daily rates) by up to 20% per annum for the next three years. Separately, we removed all acquisition assumptions for FY09. We also raised our cost-of-debt assumption for ART to 3.5% from 4% for FY08.
• Unchanged DDM-derived target price of S$0.56 (discount rate 10.5%). Current P/BV appears attractive at 0.4x relative to the S-REIT’s 0.51x. However, price catalysts are likely to be limited with the cloudy outlook for leisure and business travel.