Author: tfwee
Suntec – CS
Its office story has been fully priced in
● SUNT is favoured for its exposure to the rising office market given that 87% of its office leases are due for renewal in FY07-09, of which close to 91% of leases up for renewal are paying ~S$4.10psf against the recently achieved S$6.50 – 8.00psf.
● SUNT purchased 2.5% of its 1.05mn sq ft of Suntec office strata unit acquisition target at a 5% property yield. In our forecasts, we have assumed the entire 1.05mn sq ft to be purchased by end-FY2010.
● The first instalment of 34.5mn of the total 207mn deferred units, part of its purchase settlement at IPO, is due in June 2008. As the deferred units are not subject to any lockup period, there could potentially be a share overhang. Including the deferred units, SUNT’ DPU yields are lower at 3.7-4.4% versus the 4.3-4.8%.
● Our new target price of S$1.81 is based on a lower FY07-09 average required yield of 4.2%, and is supported by our DCFvalued NAV of S$1.74 or S$1.55 on a fully diluted basis. Downgrade to a NEUTRAL from Outperform.
Suntec – DBS
Comment on Results
Suntec reported results slightly below expectations, delivering 1.963 cents for 1Q07 which grew by 14% y-o-y. Revenue grew 16.5% y-o-y, mainly due to full recognition from Park Mall and Chijmes as well as organic growth of office and retail portfolio. Office revenue grew 18.3% while retail revenue grew 15.6%. Stripping out growth through acquisitions, organic growth attributed to 14.5% and 4.7% for the office and retail portfolios respectively. With lower maintenance offset by higher property tax and property expenses, net property income grew by 21.7% y-o-y. Mitigated by rising interest costs, distribution income grew by 21.7% yo-y to S$27m. Note that for 4Q06 distribution, 0.762 cents for the period 1 October to 5 November 06 has already been distributed on 29 November 06.
Outlook
We continue to like Suntec for its exposure to the office sector on the back of bullish fundamentals. Recently, URA reported 4Q06 property market data which reflected office rentals and capital values rising 30.3% and 17% respectively. We expect office rents to continue the upward momentum and Suntec would be a prime beneficiary of spillover demand from tight vacancy in prime CBD. Moving forward, we note that Suntec is likely to enjoy three waves of positive rental reversions for its office portfolio with 92.6% of leases expiring in the next three years. With 21.1% (15.9% YTD to Dec) and 31.9% of office NLA expiring in FY07 and FY08 respectively – currently under-rented at average of low S$4 levels -there would be strong rental kicker in FY07 and FY08 with Suntec office asking rents now at S$8.50-S$9.00.
Recommendation
Despite the lack of visibility on acquisitions without the backing of a sponsor, we continue to like Suntec for: i) Its office exposure which is currently underrented ii) Retail enhancements well under progress and average retail rents continuing to deliver growth iii) Beneficiary of circle line – once completed in 2010 and for both the Suntec office and retail portfolios iv) kicker in traffic flow with Singapore’s position as major MICE hub and Integrated Resorts. We bring forward our assumption that closing rent will reach S$8 in FY07 from FY08 for Suntec’s office portfolio on the back of strong organic growth. Hence we are raising our DCF valuation for Suntec to S$2.20. Maintain Buy. Key risk to our recommendation include deferred payment in the form of units with full effect by 2011 which we have taken into account in our DCF valuation.
CCT – DBS
Prime beneficiary of asset reflation
FY06 results in line. 4Q06 DPU came in at 2.04 cents and 7.33 cents for FY06, in line with expectations. Portfolio occupancy continues to stabilize near 100% levels Renewals and new leases continue to achieve double-digit growth at 13.8% over preceding rents. Moving forward, CCT is likely to enjoy rental kicker from 52% of leases up for renewal in FY07 and FY08 for its office assets which is currently leased at below market rents.
Highest potential for debt capacity expansion. 4Q06 also saw revaluation surplus of S$356.5m which raised NAV per unit to S$1.86 from S$1.59 previously. This would be a broad based trend across the REIT sector, highlighting REITs with office exposure which will raise portfolio size on the balance sheet which translates to higher debt capacity. CCT would be the prime beneficiary as the largest office S-REIT in the market.
First foray into Malaysia. CCT has also recently subscribed to 30% stake in Quill Capita Trust (“QCT”), similar to CMT/CRCT. However initial investment size of S$28.8m is small relative to CCT and we see minimal impact from CCT’s perspective currently. As an alternate growth vehicle for CCT in Malaysia, although positive riding on the rising market, QCT would pale in comparison compared to CRCT. CRCT’s pipeline from Capitaland’s Development and Incubator funds include retail assets in any form, be it in development stage, incubation stage or stabilised assets across any geography in China.
Maintain Hold, TP S$ 2.64. We roll forward our DCF valuation to FY2011 and raise our target price to S$2.64 after incorporating contributions from QCT into our estimates and maintain our Hold recommendation.
CCT – CIMB
Strong reversions expected
• FY06 within expectations. CCT’s DPU of 2cts for 4Q06 took full-year DPU to 7.3cts, vs. our forecast of 7.4cts and consensus expectations of 7.5cts. Gross rental revenue rose 89% yoy to S$56m in 4Q06, with growth mainly led by fullquarter contributions from Raffles City.
• Strong reversions to drive organic growth. All its properties remained almost fully occupied. About 24% of its office leases will be up for renewal this year and rates are likely to surprise on the upside. The latest lease at 6 Battery Road was signed at S$13 psf/month, with the asking rent reaching S$14 psf/month, vs. S$5-6 on average that its tenants are now paying. This was above expectations. We see CCT benefiting the most from strong office rent reversions in the next two years.
• Expanding in Malaysia and China. About 20% of CCT’s assets are likely to be in Malaysia and China by 2009. Quill Capita Trust (QUIL MK, RM1.33, NR), in which CCT has a 30% interest, will be the preferred vehicle for CCT’s expansion in Malaysia. The mode of investment in China is yet to be known but could be in the form of direct asset acquisitions or investments in a China-focused REIT, à la CMT’s (CT SP, S$3.24, NR) 20% stake in CRCT (CRCT SP, S$2.77, NR).
• We introduce our FY09 DPU estimate of 11.5cts, based on S$700m worth of acquisitions in 2009 taking CCT’s portfolio to S$5.9bn, a property yield of 3% for these acquisitions (40:60 debt-equity), and 34% and 23% of office leases up for renewal in 2008-09 respectively. We raise our FY07-08 DPU forecasts by 10-20% to reflect aggressive office rental reversions in the next two years.
• DDM target price accordingly raised to S$3.00 from S$2.55, still based on a cost of equity of 5%. Our FY07 DPU estimate of 9.5cts and target price of S$3.00 translate into a forward yield of 3.2%, in line with the CY06 yield that CCT has been trading at. Potential catalysts over the next 12 months could include asset enhancement plans for Raffles City, CCT’s move into China and possibly the trust’s maiden development project. Based on CCT’s latest assets of about S$3.8bn, we estimate CCT can undertake development projects worth S$380m. In light of the anticipated stronger DPU growth and favourable news flow, we upgrade our rating from Neutral to Outperform.
CMT – DBS
Continues to deliver
Consistent set of results, in line with expectations. CMT reported FY06 results in line with expectations, with DPU growing 14.3% y-o-y to 11.69 cents. We have previously highlighted that there would be kicker for 4Q06 DPU of 0.27 cents due to 10% retained earnings from 1Q06 for asset enhancement of IMM. As a result, CMT would distribute 4Q06 DPU of 3.35 cents. 4Q06 also saw revaluation of assets of S$239.6m and S$499m for the full year, raising NAV per unit to S$1.87 which further expands portfolio base and increase debt capacity.
Steady asset performance. Active leasing management for the CMT portfolio continues to pay off, with renewals and new leases achieving rental kicker of 8% for the CMT portfolio for FY06. Portfolio occupancy continues to be healthy at 99.5%. Asset enhancement initiatives continue to be underway for CMT, with AEI for IMM, Bugis Junction, Tampines Mall and Sembawang Shopping Centre expected to raise NPI by S$18.6m when completed by 2Q08. Moving forward, enhancement of JEC is also in the pipeline.
Outlook for physical market remains positive. The revaluation would expand the portfolio base on its balance sheet and provide further headroom in terms of debt capacity for acquisitions. Outlook remains positive, with double-digit retail rental growth expected by market watchers.
Maintain Buy, TP S$ 3.64. We continue to like CMT for its strong pipeline of acquisitions backed by strong sponsor Capitaland, consistent delivery of asset enhancements, alternate growth channel in China’s retail sector through CRCT and exposure to positive fundamentals in the Singapore hotel sector through Raffles City asset. We are revising our target price up to S$ 3.64 based on DCF valuation after raising NPI assumptions backed by enhancements. Maintain Buy.