Author: tfwee
CitySpring – OCBC
Nascent infrastructure play
Singapore-listed infrastructure play. CitySpring Infrastructure Trust (CitySpring) is a Singapore-listed business trust focused on infrastructure assets. It owns City Gas, Singapore’s only producer and retailer of piped town gas. It also owns a 70% stake in SingSpring, Singapore’s only supplier of desalinated water to the Public Utilities Board. After its IPO, CitySpring went on to acquire Basslink, an electricity interconnector in Australia. These assets essentially operate as regulated monopolies with regulated tariffs (City Gas) or under long-term contracts and concessions (SingSpring and Basslink).
Backed by Temasek. CitySpring is sponsored by Temasek Holdings (Temasek), a private investment vehicle wholly owned by the Singapore government. Temasek owns CitySpring’s trustee-manager and is also the trust’s single largest unitholder with a 27.8% stake. Investing and owning infrastructure assets is not an easy task, with risks on political, social, legal, and technical levels. Temasek has a strong balance sheet, is highly experienced in infrastructure investments, and has a strong business network internationally. This is a key differentiator in our opinion.
Stable, non-cyclical cash flows. CitySpring’s assets feature some unique characteristics including: (1) a monopolistic market position or strategic consideration; (2) 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. We find the stability of CitySpring’s cash flows attractive, especially in current market conditions. The non-cyclical nature of CitySpring’s cash flows is also a major differentiator against other yield plays like shipping trusts and REITs who may be heading into industry downturns.
Deferred cash call blocking further growth. CitySpring originally intended to fund last year’s S$1.5bn Basslink acquisition on a 3x debt-to-equity basis. CitySpring then decided to wait out difficult market conditions, and has postponed the equity issue indefinitely. Basslink is currently 100% debt financed, which we do not find sustainable. In our view, CitySpring’s current portfolio lacks critical mass and we would like to see it significantly grow its portfolio through further acquisitions. This makes the equity cash call necessary, not just inevitable. This affects our valuation of the trust and we initiate coverage on CitySpring with a HOLD recommendation. Our fair value estimate is 80 S cents, or 15.5x FY09F EV/EBITDA (adjusted for SingSpring’s lease receivable repayment). CitySpring is paying out 7 S cents a year, which translates to a 10% yield.
CMT – DBS
Retail unit management changes
Story: In a round of management changes at both CMT and CRCT, Mr Pua Seck Guan has resigned as CEO of CapitaMall Trust Management Ltd (CMTML), citing pursuit of personal interests as the reason. The leadership of CMTML will be transferred to Mr Lim Beng Chee, who will in turn relinquish his position as CEO of CapitaRetail China Trust Management Ltd (CRCTML) to Mr Wee Hui Kan, currently the Deputy CEO of CRCTML. Mr Lim who is currently the Deputy CEO of Capitaland Retail (CRTL), will also assume the role of CEO of CRTL from 1 Nov 2008.
Point: We expect the change in management to be effected smoothly given that Mr Lim has been with Capitaland since 1999 and was instrumental, together with Mr Pua, as key drivers of Capitaland’s growth as a leading retail mall manager and owner in Asia. In addition, Mr Lim was also involved in the formation and growth of the two retail reits, CMT and CRCT. We believe CMT would continue to enjoy its pole position as the largest retail S-reit with an ability to execute its asset enhancement activities.
Relevance: Share price of CMT had held up well in the recent market rout. Current valuation of 5.4-5.5% FY08 and FY09 yield appears relatively expensive in view of the hefty 200-300bps premium over its comparable peers’ yields of 7.4-8.4%. We downgrade the stock to Hold largely on valuation grounds, given the small 6% upside to our target price of $2.85. The significant trading yield spread premium over other retail S-reits and current volatile market conditions may likely cap the short-term performance of the stock. Catalyst for share price performance of the stock could likely depend on newsflow on potential acquisition of new properties in the pipeline.
Suntec – DMG
Lehman Issue a Non-Issue
Lehman occupies minimal amount of office space. In the wake of Lehman Brothers’ (Lehman) debacle and subsequent Chapter 11 bankruptcy filing, its Singapore operations has also ceased after SGX suspended it from taking new securities and derivatives positions. As such, it is inevitable that we examine the implications for its present office landlord – Suntec REIT (SRT). We note that Lehman presently takes up approximately 40,000 sf of office space in Suntec City Office Tower Five. This represents a mere 3.1% of SRT’s total Suntec City Offices portfolio of 1.29m sf, and an even smaller 1.4% of its entire portfolio of 2.90m sf. Although Lehman employees have not vacated and talks over any possible settlement have yet to commence, we predict a minimal 0.9% dip in FY09 DPU in the event of a termination by end-Sep 08 and a replacement tenant cannot be found within the next six months. As such, exposure to the Lehman collapse is not a major issue. In any case, Lehman is legally obligated to fulfil its remaining lease tenure (renewed early last year) if termination occurs.
Staying on course for positive rental reversions. As Lehman’s lease agreement was only renewed in early-07 at the prevailing market rents then, SRT does stand to benefit from positive rental reversions if a new tenant were to step in. Most importantly, the organic drivers underlying Suntec City Office Towers remain intact, with a considerable 42.7% of the leases due in FY09 still paying at significantly below market rents, coupled with high occupancy levels. Other banking & financial services tenants within SRT’s portfolio, such as Deutsche Bank and UBS (Suntec City Office Towers), as well as Deutsche Bank, Credit Suisse, UBS, ABN Amro and Barclays (One Raffles Quay) have either remained relatively unscathed or managed to remain solvent.
Medium-term office story still stands. The recent signing of new leases at Marina Bay Financial Centre Phase 1, as well as new leases and renewals at Capital Tower and One George Street, provide positive reminders of Singapore’s growing position as a regional financial hub. At a time when the global investment climate is severely weakened, this implies that demand for office space remains and that the medium-term office story is still thriving.
Maintain BUY at S$1.87. Of late, office landlords, particularly office REITs, have been absorbing a sizable amount of flak on the back of global macroeconomic uncertainty, as well as expected falls in occupancy levels, dips in capital values and rental rates. The creeping up of unemployment rate (from 4Q07’s 1.7% to 2Q08’s 2.3%) has not contributed positively. Given the historically low P/B levels of office REITs at 0.5x currently, share prices appear to have factored in these negativities. Although we are not expecting the weakened sentiments to cool off anytime soon, we continue to believe that SRT will be able to grow organically. On a YTD comparison, it has also outperformed the other office REITs. Since the Street first got wind of Lehman’s highly possible collapse, SRT has slipped 15.0%. We believe any remaining overhang should evaporate with SRT’s limited exposure to Lehman. At present levels, the stock is trading at a FY08-09 yield of 7.2 – 8.7%, implying a 430 – 580 bps premium over the 10-year SGS bond yield of 2.9%. Maintain BUY at S$1.87.
PST – BT
PST takes delivery of its biggest vessel so far
PACIFIC Shipping Trust (PST) yesterday took delivery of its biggest vessel to date – the 4,250-TEU (twenty-foot equivalent unit) CSAV Laja, increasing its slot capacity by 24 per cent to 21,714 TEUs.
It also announced that subscription for its preferential offering to raise about US$92.3 million begins today.
The move is aimed at positioning it for yield-accretive acquisitions.
The 11th vessel begins its five-year time charter to Compania Sud Americana de Vapores SA today following PST’s acquisition of the vessel from Pacific International Lines unit Tranpac Holdings Inc, Panama, which at the same time raises its total indicative asset value to US$435 million.
‘Apart from the increased revenue, the entry of this newbuilding is significant because it further diversifies PST’s vessel sizes and charterers. CSAV is one of the oldest shipping companies in the world and the largest in Latin America and we look forward to increasing our portfolio of long-term charters to such reputable industry players,’ said Alvin Cheng, CEO of PST Management Pte Ltd, the trustee-manager.
In November, PST is expected to take delivery of its 12th vessel, bringing total slot capacity to 25,964 TEUs, with a total indicative asset value of US$510 million.
Mr Cheng added: ‘We have started to see the correction of vessel prices, which we had earlier anticipated – this will provide us with possible opportunities to improve our returns by seeking out yield-accretive acquisitions at the right price. This is in line with our diligently managed growth plans for PST and we aim to continue generating attractive returns to unitholders.’
PST’s preferential offering will strengthen its capital structure and provide it with an increased borrowing capacity, thus enhancing PST’s financial flexibility to pursue medium-term yield-accretive growth opportunities, Mr Cheng said.
Singapore-registered unitholders will be able to subscribe for their entitlements from today to Sept 24.
The offer is on the basis of three new units at 36.5 US cents each for every four existing units held.
‘We look forward to the participation from each and every Singapore-registered unitholder of PST as the preferential offering will lower our debt levels and create room to raise new investment funding to react swiftly to acquisition opportunities when they arise,’ said Mr Cheng.
PST shares closed half a US cent down at 35.5 US cents yesterday.
Cambridge – CIMB
Steady income generator
• Assets have nearly doubled in size since listing. Listed on the SGX on 25 Jul 06, Cambridge Industrial Trust (CIT) is a real estate investment trust (REIT) that invests in income-producing industrial assets. Its assets have nearly doubled from S$519m at the time of listing to S$967m as at 30 Jun 08. Properties under management also increased from 27 to 43. All of CIT’s assets are located in Singapore. However, management has a mandate to acquire industrial properties in Asia.
• Visible earnings from long leases with built-in rent increases. Long lease tenures averaging 6.4 years, built-in rent increases, controlled property expenses as well as resilient demand from the manufacturing sector add visibility to CIT’s earnings in the medium term.
• Full shariah compliance positive for future funding. CIT is in the midst of conversion to full shariah compliance, which will enable it to cultivate a new investor pool when it raises capital or issues debt.
• Initiate with Outperform rating and target price of S$0.90. Using DDM valuation, we initiate coverage with a target price of S$0.90 (discount rate 8.0%, terminal growth 2%). This offers a total prospective return of 72% from potential price upside of 61% and a forward yield of 11%. Its current price of S$0.56 is at an all-time low since listing and a 29% discount to its NAV of S$0.79, representing an attractive entry point in view of its visible earnings and attractive dividend yields.
Link – Table