Author: tfwee
MMP – OCBC
Finally delivers on acquisition promise
Flattish growth. Macquarie MEAG Prime REIT’s (MMP) 1Q06 came in within expectation. Top-line came in at S$23.4m, improving 3.5% QoQ, but Net Property Income (NPI) of S$17.3m (-0.4% QoQ) led to flat distributable income per unit (DPU) of 1.47 cents. The top-line benefited from positive rental reversion, while the lower NPI was attributed to higher property expenses (mainly depreciation) as the result of the installation of escalators linking Wisma Atria basement to Orchard road and higher cost for changing the tenancy mix.
Organic growth to come from office. MMP’s office space is presently under-rented with rents at about S$5psf/mth, whereas market rents are approaching the S$8-10psf/mth mark. More importantly, with 182,000 sq ft (about 70% of office space) of leases due for renewal over the next two years, we see a lot of upside potential.
Finally bought something but accretion marginal. On the acquisition front, MMP has been fairly disappointing since its IPO in 2005. However recently, it has made up for lost time by making two separate acquisitions in two different countries. One was in Tokyo (7 retail properties) for a total of S$182.5m, while the other was for a 50% stake in a Chengdu retail mall
for S$30m. Though in absolute terms these purchases are small and has no material impact on its asset size of S$1.5bn, it is nevertheless a step in the right direction. With gearing at only 26%, debt funding makes the most sense. We estimate that if the acquisitions were fully debt funded,
the full year DPU accretion is about 0.2 cents. As our FY07 and FY08 forecasts already contain growth assumptions, we will retain our numbers for now and will review them in 2H07. We also remain hopeful that more meaningful assets can be acquired.
Maintain BUY. MMP remains one of the very few REITs with a low price to book ratio. It is currently trading at about 1.1x P/B. This implies that market has not factored in growth and that upside surprise is possible if a meaningful acquisition is done. Finally with a DPU yield of about 5.0% and a capital value upside of about 6.5%, total return of over 10% is possible. We thus remain positive on MMP and see it as one of the lowest-risk REITs in the market. Maintain BUY with a fair value of S$1.32.
ART – OCBC
1Q boosted by recent acquisitions
Results benefited from recent acquisitions. Ascott Residence Trust (ART) reported 1Q07 revenue of S$29m and distributable income of S$8m, 5% and 10% higher than its own forecasts respectively. Distributable income per unit (DPU) was 1.59 cents, in line with forecast. ART’s higher 1Q revenue was primarily driven by higher average daily rates in Singapore and the Philippines. The strong performance was further boosted by the inclusion of the Philippines (Ascott Makati) and Vietnam in late March 2007.
More of the same in 2H07. In 2006, ART announced the acquisition of five assets worth about S$218m. So far this year, ART has announced deals worth S$144m, and when completed, this will raise its asset size to about S$1.1bn. This implies asset growth of 40% since its IPO. Going into 2H07, we see ART announcing more acquisitions to drive its growth.
Cash call well subscribed. In our Jan 07 report, we had articulated that a cash call was imminent. This was because as of end 2006, ART’s gearing of 29% (and with no credit ratings) left not much headroom for more debt. Furthermore, it had already announced S$266m of acquisitions which had yet to be completed. Indeed in Mar ART had an equity fund raising to raise S$199m via the issue of 105.3m new units. The fresh equity together with the credit rating means that ART is ready for further acquisitions. We estimate that it has an estimated war chest of about S$353m.
ART S$2.0bn target size is achievable. With the potential to gear up to 60%, ART should see no issue in achieving its target asset size of S$2.0bn by end 2008. Based on current size of S$1.1bn, this means about S$450m of acquisitions per year. We see a high possibility of ART exceeding this and believe S$2.5bn as achievable with the bulk of its acquisitions coming
from parent The Ascott Group.
Maintain fair value S$1.94. Even though we continue to like ART as a unique service residential REIT play, capital value upside remains limited. Moreover with DPU yield at only about 3.7%, the estimated total potential return of only about 8.5% is not compelling. We thus maintain our HOLD rating and fair value estimate of S$1.94.
FrasersCT – DMG
FCT posted an in-line set of 2Q07 results with distributable income exceeding IPO forecast by 14.4% to $10.3m (DPU: 1.67cts), thanks to higher rental and other income. Going forward, the focal point of FCT would be on its asset enhancement and acquisition activities. Over the next 2 years, Anchorpoint would be repositioned as a F&B-focussed village mall while retail areas at Causeway Point and Northpoint would be reconfigured to increase returns. In terms of acquisition, its plan to double floor space under management is certain but would happen only from early FY09 onwards.
FCT is currently trading at FY07 yield of 3.7% and P/book NAV of 1.1.57x, indicating much of its growth expectations could have been priced in. We have raised price target to $1.86 but lower our call to Hold on valuation grounds.
Results in line with expectations. Distributable income was 14.4% ahead of IPO forecast to $10.3m (DPU: 1.67cts) while topline came in 3.9% ahead of projections to $19.6m. The better performance was due to higher rental income and lower than projected operating expenses.
Lifted by greater rental and other income. The rise in revenue was due to a threefold increase in turnover rent during the Chinese New Year period. Higher patronage during this festive period also resulted in increased carpark and casual leasing income. During the quarter, a small 0.4% of FCT’s portfolio was renewed, however, rentals achieved were at a significant 10% above the preceeding level.
FCT offers significant organic growth potential. Going forward, the focus for FCT would be on its AEI and acquisition potential. Enhancement activities at Anchorpoint are scheduled to begin in May 07. It would also look to boost returns from Causeway Point and Northpoint by reconfiguring and rejigging tenant mix when the leases are up for renewal. An estimated 45% and 50% of NLA at Causeway Point and Northpoint are expiring over the next 18 months. .
Acquisition pipeline is certain. FCT is committed to double the area under management to 1.3msf NLA in the medium term. In the pipeline are Northpoint 2 and YewTee Point, scheduled to complete in early FY09, as well as the Bedok Town Centre and Centrepoint. Together, these properties could provide a further 0.63msf GFA.
Raised price target to $1.86 but downgrade to Hold. While we still like FCT for its strong organic growth potential and visible pipeline, this appears to have been largely factored into share price. The stock is trading at FY07-FY08 yields of 3.7-4.4% and P/book NAV of 1.57x. Our price target of $1.86, based on doubling asset base to $2b, offers less than 10% upside.
FrasersCT – OCBC
Downgrade on valuation
2Q was better than 1Q07. Frasers Centrepoint Trust (FCT) reported 2Q07 revenue of S$19.6m (+1.9% QoQ) and distributable income of S$10.3m (+8.7% QoQ). Distributable income per unit (DPU) came in at 1.67 cents (1Q07: 1.54 cents). The better results were due to higher turnover rent (as a result of the Chinese New Year period), better reversion in rental rates, higher casual leasing and lower costs. FCT also benefited from S$0.198m from its sponsor as a result of the revamping of Anchorpoint.
Tweaking forecast. With tighter cost control and better operating matrix, we are adjusting our FY07F DPU from 5.95 cents to 6.31 cents, but maintaining FY08F DPU of 7.57 cents. Growth will come from its acquisition pipelines; namely Centrepoint, Northpoint 2, Yew Tee Point and Bedok Mall. The latter will be redeveloped by FCT’s sponsor, Fraser Centrepoint Ltd (FCL). In terms of timeline, Northpoint 2 and Yew Tee are likely to be acquired by late 2008 with the Bedok site probably in 2010. We do not expect any funding issue as FCT has recently obtained a credit rating, meaning that its current gearing of about 27% can be raised to 60%. This translates to a war chest of over S$300m.
Asset enhancement starts in 2Q07. FCT has scheduled Anchorpoint Shopping Centre (ASC) for reconfiguration in May 2007. It intends to reposition ASC as a food mall and work is expected to be completed in 6 months. Beyond ASC, asset enhancement works (AEW) are likely to be carried out at Northpoint and Causeway Point. These latter projects are likely to have greater impact on FCT’s earnings due to its significantly larger size. However, we do not expect the completion of AEW at Causeway Point until 2008.
Downgrade to HOLD. FCT has done very well, rising over 65% above its IPO price and surpassing our fair value of S$1.59. The current price means that dilution from new units will be less. This in turn has a positive impact on our valuation. We thus raised our fair value estimate to S$1.67. At current trading range, FCT’s P/B is high at about 1.6x and trading yield is low at only about 3.7%. While we continue to like FCT for its exposure to the retail sector, strong asset enhancement possibilities and clarity in acquisitions, at current valuation, FCT no longer looks compelling. We thus downgrade our rating on FCT from BUY to HOLD.
CMT – OCBC
Buys CapitaRetail Singapore
Slightly better than expected 1Q. CapitaMall Trust (CMT) reported a fairly good set of 1Q07 results with revenue rising 1.0% QoQ to S$97.4m. Distributable income growth was better, rising 7% QoQ to S$51.5m with distributable income per unit (DPU) coming in at 3.0 cents. The stronger performance was attributed to better rates for new and renewed leases. For the period, CMT also benefited from lower operating expenses by about 5.2% QoQ. The lower cost was due to high base effect in 4Q06 as a result of one-off marketing and maintenance expenses incurred at Plaza Singapura.
Buying CapitaRetail Singapore. Separately, CMT also announced that it will be acquiring CapitaRetail Singapore (CRS) for an aggregate value of S$710m. As CMT current already owns 27.2% of CRS, the outlay for CRS will be S$516.9m. Presently, CMT’s gearing is about 37%; hence we see no issue with CMT financing this acquisition entirely with debt. We estimate that post acquisition CMT’s gearing will be at about 45% and this is still well within the 60% limit. However in terms of earnings accretion, CRS is unlikely to be a big booster as the assets are bought with a net property income yield of only 4.9%. Assuming full debt funding and cost of debt of 3.5%, we estimate full year DPU accretion at only 0.6 cents. Since the CRS acquisition is likely to complete in June, contribution in FY07 is only expected at about 0.3 cents.
Raising earnings estimates. Based on the above, we have raised our FY07 DPU forecast from 11.92 cents to 12.62 cents and FY08F DPU from 12.10 cents to 12.95 cents. CMT’s growth strategy remains focused on acquisitions, asset enhancement works (AEW) and development. We expect CMT’s maiden venture into development project to be in late 2007, and will probably be in Orchard Turn after the sale of the residential component.
Maintain HOLD. With the CRS acquisition, CMT’s asset size will be boosted from S$4.6bn to S$5.3bn. Furthermore, with the likelihood of CMT acquiring a development project soon, it is on target to achieve an asset size of S$7.0bn. In light of this, we have raised fair value from S$2.85 to S$3.44. CMT is not cheap, trading at a very high price-to-book of over 2.0x and with yield at below 3.5%. We thus maintain our HOLD rating.