Author: tfwee
A-REIT – DMG
Laggard to A-REIT
Attractive yields and valuations despite strong rally. We raise our TP to S$0.64 from S$0.61 on the back of lower cost-of-equity assumption. CREIT will be reporting 3Q09 results on 27 Oct and we expect annualised DPU of 5.09¢, a 15.5% decline over FY08. The fall in DPU is due to the higher refinancing cost that was concluded at end-2008. Whilst stock price has doubled since March underpinned by its successful refinancing, CREIT still trades at attractive FY10 yields of 11.4%. Maintain BUY.
Defensive business structure is a relative strength. CREIT remains our top pick within the small cap S-REIT space. We favour it for its bondlike characteristics anchored by: 1) long tenant leases of 5.1 years; 2) high levels of bank-guaranteed security deposits of 16 months; 3) built-in portfolio rental escalation of 2% pa; 4) high occupancy and diversified tenant mix; and 5) 51% of portfolio sublet providing second layer of income support. Besides, its existing interest costs are hedged for the next three years, minimising interest rate fluctuation risks. CREIT does not have any debt expiring until Feb 2012.
Further devaluation – an unlikely event! CREIT’s portfolio was written down by 9% to S$880m following a 50bps increase in cap rate used by property valuers. This resulted in its gearing rising to 44% in 2Q09 from 40% in 1Q09, and a lower book value of S$0.62/share (S$0.74/share previously). CREIT’s portfolio was valued based on a cap rate of 6.75-7.75%. We believe the vulnerability of further rises in cap rate is low, backed by its built-in step-up rental leasing arrangements and low risk free instrument yields.
A laggard to A-REIT – room for further yield compression. CREIT’s dividends are well supported by rental guarantees and step-up rental agreements. Prior to the credit crisis, CREIT traded at 140bp yield premium over A-REIT. That gap now stands at 440bp, suggesting that it is very much a laggard play. At our TP of S$0.64, CREIT offers an attractive FY10 yield of 8%, a reasonable peg in our view. Recall: A-REIT offers a recursive yield of 6.5% at our TP estimate of S$2.05.
CDL H-Trust – DMG
‘V’ recovery engenders yield compression
Best proxy to a multi-year tourism resurgence. We raise our TP to S$2.15 from S$1.80 on the back of lower cost-of-equity assumption. CDLHT will be reporting 3Q09 results on 30 Oct and we expect annualised DPU of 8.0¢, a 25% decline over FY08. We are sanguine that CDLHT remains the best proxy to a multi-year tourism resurgence that will take place in 2010. CDLHT is our top pick among the large cap S-REIT counters. Price target is based on a 8.5% (9.3% previously) cost-of-equity assumption. Maintain BUY.
Supernormal visitor growth of 30% – a real possibility! The success stories of countries with similar service offerings reinforce our view that Singapore’s visitor growth will easily punch through the 15-20% level in the initial year of opening (possibly even 30%), with sustained 5-10% growth thereafter. Visitors are expected to extend their stay, leading to a 20-35% spike in visitor days in 2010. Our feedback from hotel operators indicates that pricing power will return when occupancies hover above 80%. We expect systemic occupancies to rise to 84% next year, with ARRs rising to S$250. We believe room demand will immensely overshadow the 16% new supply in 2010.
Stock has outperformed, but still at mid-cycle valuations. We believe 2Q09 reflects the bottom of the earnings cycle for hotel operators, and a ‘V’ recovery will likely transpire beyond 2010, powered by the resurgence in tourism offerings. Despite surging from its S$0.43 March lows, we do not think stock price is fully reflective of the sated impact of the IRs. In the heydays of 2007-08, CDLHT traded at ~5% yield, below the current 7.2% level. We estimate FY10 DPU to spike 35% to 10.8¢, inching above the FY08 levels of 10.6¢.
Euphoric aura could see yields compress to 5%. We believe the stabilising global economy and the twin openings of the IRs will remain as euphoric events in 2010, providing sustained performance for CDLHT’s stock price. We suspect CDLHT could trade towards its heyday yields of 5%, implying a recursive fair value of S$2.15. CDLHT trades at 6.9% FY10 yield, which in our view suggests that the stock has further legs to ride the ‘V’ recovery.
CCT – DMG
Outlook remains challenging
Raising our target price to S$0.87 from S$0.73. Our DDM-backed target price reflects a lower cost-of-equity assumption of 9.1% (10.2% previously). We reduced our risk free rate assumption by 50bps to 2.5%. CMT will be reporting 3Q09 results on 21 Oct and we expect annualised DPU of 6.29¢, a 42.8% decline over FY08. The decline in DPU is attributed to the rights adjustment. Maintain SELL.
Negative rental reversion expected. CCT’s portfolio rents of S$8.14/sqft are above 3Q09 spot rates of S$7.50/sqft. Our channel checks indicate that some landlords in prime areas are currently negotiating rents at between S$6-7/sqft, 20% lower than 3Q09 figures. Despite the economy being technically out of a recession, it is clearly still a tenants’ market and the focus on tenant retention remains paramount for all landlords including CCT. In our view, most office landlords will likely shift their focus on occupancy optimisation at the expense of rental rates, putting further pressure on rents in the coming quarters.
Formidable supply before mid-2011. Over the next 20 months, there will be six major properties due to TOP in the Raffles Place vicinity, out of which, only one (MBFC Tower 1) has been fully pre-leased. The remaining five properties constitute 3.4m sqft of leasable area, many of which will be subjects of premarketing between now, through to mid-2011. In the coming months, landlords of these properties will almost certainly be scrambling to put forward highly competitive rates, a scenario that could further dampen the already fragile rental market. We believe CCT could feel the biggest impact considering that 1) its expiring rents at 6 Battery Road building are S$12.4/sqft for 2010 and S$16.2/sqft for 2011; 2) $7.1/sqft for Capital Tower in 2010; 3) S$10.4/sqft for Raffles City Tower in 2010; and 4) S$12.4 for One George Street in 2011.
Cautious on office sector. At current prices, CCT offers investors a dividend yield of 6.3% for FY10, compared to its historical yield of 5.7% between 2005 and 2007. We view risk-returns on the counter as unfavourable and recommend investors to sell into strength. Our recommendation is also predicated on the subdued earnings visibility within the office space.
CMT – DMG
Fully valued; needs the acquisition push
Raising our target price to S$1.45 from S$1.74. Our DDM-backed target price reflects a lower cost-of-equity assumption of 9.3% (10.2% previously). We reduced our risk free rate assumption by 50bps due to continued low interest rates. CMT will be reporting 3Q09 results on 22 Oct and we expect annualised DPU of 8.39¢, a 41.3% decline over FY08. The decline in DPU is attributed to the rights adjustment. Maintain NEUTRAL. Await entry at S$1.55.
Attention could shift to CapitaMall Asia (CMA). The potential listing of CMA as an alternative Asian retail play could entice major investors. We believe this would be mildly negative on CMT. However, CMT still holds the first right of refusal to CMA’s assets including ION Orchard. We have not factored this into our estimates.
Actively scouting for assets. CMT has articulated its criteria for acquisitions as: 1) initial DPU accretion; 2) scope for asset enhancement; and 3) sustainability of market rents. We understand CMT is particularly keen on third party malls especially those of Pramerica, which could provide a strategic fit with its existing portfolio. Pramerica owns 4 suburban malls in Singapore.
Strong connectivity to boost retail footfalls despite rising competition. Singapore will see an unprecedented increase in retail space of 5.3m sqft by 2011. Out of which, downtown accounts for half of this new supply. Raffles City and Plaza Singapura (~30% of CMT’s rental income) are situated within this zone. We therefore expect higher competition; however this will be mitigated by its excellent connectivity to MRT stations. We are sanguine that the opening of the Circle Line and the two integrated resorts in 2010 will boost shopper traffic.
Maintain NEUTRAL rating. CMT trades at an unattractive 5.2% FY10 yield. While we continue to recognize CMT’s impeccable mall management expertise, valuations for the counter appear rich compared against its historical heyday yield of 5.7%. With a subdued earnings visibility, we view risk-returns on the counter as unfavourable and recommend investors not to accumulate the stock at current levels.
A-REIT – DMG
Lacking catalysts
Raising our target price to S$2.05 from S$1.72. Our DDM-backed target price reflects a lower cost-of-equity assumption of 8.2% (8.7% previously). We reduced our risk free rate assumption by 50bps due to continued low interest rates. A-REIT will be reporting 2QFY10 results on 19 Oct and we expect annualised DPU of 13.26¢, a 12.2% decline over FY09. The decline in DPU is attributed to the larger share base following its share placement exercise earlier this year. Maintain NEUTRAL. Recommend entry at S$1.80.
Occupancy expected to remain at healthy levels. Reflecting the stabilisation in global demand, occupancy rate for A-REIT’s multi-tenanted properties is expected to remain at 94%, unchanged over the preceding quarter. We expect overall portfolio occupancy to remain at 97% owing to the contribution from single tenanted buildings with long term leases. Through our channel checks, we have not heard of any recent tenancy defaults. Systemic hi-tech rents have been declining in tandem with office rents. However, as A-REIT’s hitech/ business park properties are still 20-30% below market spot rates, we expect rental reversion to remain positive.
Focus on built-to-suit and other acquisition opportunities. Following its S$296m equity fund raising exercise, A-REIT has a sturdier balance sheet with a gearing of 29.3%. With a gearing of below 30%, we believe there is little need for management to further recapitalise its balance sheet, easing concerns that our forecast dividend yield would be diluted. A-REIT has indicated that about S$120m of its recent proceeds could be used partly or wholly fund potential acquisition and/or built-to-suit development opportunities.
Still trading above heyday yields of 6%. At current prices, A-REIT offers investors a stable dividend yield of 7% for FY10 and FY11 – with dividends well supported by the long-term leases on single-tenanted buildings which accounts for 50% of revenue. Between 2005 and 2007, A-REIT traded at 6% forward yield. Our TP of S$2.05 offers a yield of 6.5%, a reasonable peg in our view. We recommend buy on dips as stock has rallied 80% since Mar 09.