Author: tfwee
CCT – OCBC
Consistently outperform
Results were above expectation. CapitaCommercial Trust (CCT) reported a set of good results that exceeded our expectations. Gross revenue increased by 34.4% YoY and 2.6% QoQ to S$100m and the increase came from the acquisitions of One George Street and Wilkie Edge and also positive rent reversions. Increase in operating costs was partly mitigated by the lower property tax. A loss of S$684.8m was recognized as a result of the downwards revaluation of its investment properties, which had already been announced during the Rights issue and has no impact on cashflow. As a result, a loss of S$636.1m was
recognized in 2Q09 but distributable income to unitholders grew by 33.2% YoY and 5.8% QoQ to S$48m.
Good operating performance. Operating performance in 2Q09 remained encouraging. CCT signed new leases and renewals for 139,380 sq ft (4.1% of NLA) of spaces and achieved new rents at 45% higher than previously signed rents on aggregate. While this was weaker than that achieved in 1Q09, it is still a good achievement, considering the fact that average Grade A office rent had fallen by 17.5% QoQ in 2Q09. Even though CCT’s portfolio occupancy rate had fallen from 96.7% in 1Q09 to 96.2% in 2Q09, this remained higher than market occupancy rate.
DPU of 1.71 S-cents for 2Q09. DPU of 1.71 S-cents has been declared for 2Q09, translating to an annualized DPU yield of 7.9%. Together with the DPU from 1Q09, unitholders will receive a semi-annual payout of 3.33 S-cents for 1H09, after accounting for the dilution from its Rights issue. The Rights units are also entitled to the DPU declared in 1Q09.
FY09 DPU forecast raised to 6.4 S-cents. We are now raising our FY09 DPU forecast by 5.3% from 6 S-cents to 6.4 S-cents after taking into consideration better-than-expected rent reversions in 2Q09. Our new forecast translates to a DPU yield of 7.3% for FY09. Our FY10 DPU forecast has also been raised by 10.5% from 5.4 S-cents to 5.9 S-cents.
Fair value raised to S$1.07; Maintain BUY. Our fair value of CCT has now been raised to S$1.07 (previously S$0.96), which is pegged at par to our RNAV estimate. While the office sector continues to face oversupply issues, we expect CCT to outperform its peers on the operating aspects, given its strong track record. We believe that this will be a justification for the valuation premium of CCT over its peers. We maintain our BUY rating.
FCT – DMG
Boring But Defensive
3QFY09 results in-line with expectations. FCT reported a 3.2% YoY gain (+4.3% QoQ) in 3QFY09 DPU to 1.94¢. Annualised DPU of 7.3¢ came in slightly ahead of our forecast but in-line with consensus. FCT will trade ex-3Q09 distribution on 30 Jul 2009. Price target raised to S$1.17 (S$0.83 previously) to reflect a lower cost-of-equity assumption of 7.5% (9.5% previously) and terminal growth rate of 1% (nil previously).
Who says boring is bad? Apart from its resilient suburban portfolio, FCT stands out among the S-REITs as one of the least aggressive in terms of acquisitions. On hindsight, we think management has been among the most effective in terms of preserving the stock’s theoretical valuation through its
strong asset enhancement initiatives and cautious acquisition stance. With that, FCT continues to boast commendable financial credit metrics and a strong
balance sheet, which does not warrant any dilutive equity capital raising in the foreseeable future.
Resilient portfolio with limited downside. At current prices, CCT offers investors a dividend yield of 7% for FY09 and 7.2% for FY10. Causeway Point and NorthPoint, which contributes to 92% of NPI, are suburban malls which are resilient even during periods of recession. FCT has a strong balance sheet with gearing of 32.7% and interest cover of 4.5x. As all acquisitions are put on the backburner, there is no need for any equity raising in the near-term.
Low beta and high earnings resilience justify lower COE assumption. Like most REITs, FCT has risen sharply (+75%) since Mar 09, providing a forward
yield spread of 470bps above risk-free instruments, 110bps above its historical 360bps average. Despite the sharp increase, we think a forward yield of 7.2% continues to underscore our BUY justification on the counter. This is in view that FCT has one of the lowest betas (0.75x) among S-REITs, which typically average 1.1x. The relative stability of the stock price justifies a lower cost-ofequity assumption, hence higher theoretical fair value. Stock still undervalued at current levels. Trade stock to S$1.17 (~6% yield).
FSL – OCBC
Finally looking sustainable – upgrade to BUY
New amortizing strategy. FSL Trust’s 2Q results were in line with our expectations. As per guidance, 2Q DPU is 2.45 US cents. Key for us: FSLT has introduced longer-term DPU guidance from 3Q09 onwards – the trust is targeting a payout of 1.5 US cents per quarter or around 50% of free cash flows. Retained cash will principally be used to prepay loans. We understand this new guidance is driven by discussions with lenders. We expect loan-to-value covenant concerns to become a non-issue once these discussions conclude. Everything has a price of course, and here lenders look to be demanding a new amortizing strategy and likely higher interest margins. Our new assumptions: 1) FSLT will pay down around US$35m of debt every year; 2) all-in interest costs will rise from about 5.25% to 5.85%. This is subject to revision when the actual agreement is finalized and disclosed.
Finally looking sustainable. 3Q DPU is down to even below IPO levels (with 13 vessels then versus 23 now). Unitholders will have to accept that this reduced payout is the hangover after the 100% payout “party” they have enjoyed for so long. A consolation – in our opinion, this is finally a realistic number. Right since when we initiated coverage over a year ago, we have been saying the trust’s aggressive payout was unsustainable. With this new approach, FSLT now looks more like a viable long-term investment vehicle for serious shipping trust investors.
Expect stability, not growth (without new equity). We reiterate that the time for steadily accelerating DPU has gone. Meaningful DPU growth will necessitate acquisitions – but in our opinion, any new vessel buys would need to be financed on the back of fresh equity. Consequently, unitholders should constrain their expectations to a stable stream of income based on the 50% payout regime.
Upgrading to BUY. Our updated discounted FCFE value for FSLT is S$0.84 (10% discount rate, prev: S$0.83). In our view, the balance sheet side of the trust’s challenges is mostly resolved (with conditions/pricing still uncertain). The other concern that remains (industry-wide) is counterparty risks. We ascribe a 10% “industry uncertainty” discount to reach a fair value estimate of S$0.76 (prev: S$0.58). This implies a total return of about 28% (15% upside, 13% yield). We like FSLT because of its 1) new more sustainable business model; and 2) its diversified vessel mix of containers, tankers and dry bulk carriers. For these reasons, FSLT is now our top pick for the sector. Upgrade to BUY.
FSL – DBS
DPU cut will pay off in long run
• Guides for lower DPU payout of 1.50UScts from 3Q09 onwards, down from 2Q09 DPU of 2.45UScts
• Move will accommodate amortizing loan structure to avoid breaching loan covenants
• FY10 dividend yield still a healthy 13%
• Maintain BUY on easing covenant/ refinancing concerns, target price revised up slightly to S$0.72
Move necessary to sustain business model. While 2Q09 DPU of 2.45UScts was in line with previous guidance, management sprang a surprise by reducing its DPU guidance to 1.50UScts from 3Q09 onwards – down 39% from the current level. This would translate to a payout ratio of about 50% of its quarterly cash generated, and the remaining cash (about US$8m) would be used for debt prepayment as described below.
From bullet loans to amortizing. To avoid breaching the loan-to-value covenants on its borrowings, management is in the process of working out an agreement with its lenders – whereby they prepay debts on a regular basis in exchange for the covenant waiver. In effect, this is a shift to an amortizing loan structure.
Valuation should reflect lower risks, better growth prospects. While we cut our FY09 and FY10 DPU forecasts by 20% and 38%, respectively, we look forward to a more sustainable quarterly DPU of 1.50UScts and a definitive agreement with lenders in the
near term. Moreover, once the covenant breach uncertainty is out of the way, FSLT may find it easier to tap the equity markets and acquire potentially DPUaccretive assets at cheap valuations. Thus, with the stock trading at 13% FY10 yield, we still find the risk-reward ratio favourable and maintain BUY at a TP of S$0.72.
CCT – CIMB
Positive reversions held up distribution
• In line. 2Q09 results were in line with Street and our expectations. Net property income of S$73.3m was up 42% yoy and 5% qoq, aided by strong rental reversions and improved operating margins. Distributable income for 2Q09 was up 33% yoy. However, DPU of 1.7cts (24% of our full-year forecast) declined 34% yoy due to a bigger unit base after its rights issue. 1H09 DPU of 3.33cts was in line with
expectations, forming 47% of our full-year estimate.
• Reversions remained 45% above the last signed. Reversions for office rents were 45% above previous rental levels. Average monthly passing rents for the portfolio rose 5% qoq to S$8.14psf from S$7.73psf in 1Q09. Management commented that while typical lease periods remained three years, there were a few negotiations for longer leases such as five years. There was also increased interest
from prospective tenants from outside the CBD to take up core CBD space as market rents had come down substantially.
• Portfolio occupancy down 0.5%. CCT’s portfolio occupancy dipped to 96.2% from 96.7% in the last quarter. We observe more significant weakening at Golden Shoe Carpark (-6.4%), Bugis Village (-2.9%) and One George Street (-6.6%). On the other hand, occupancy at Market Street Carpark (+29.2%) and Wilke Edge (+5.6%) improved much, holding up overall occupancy.
• Asset leverage down to 31%. On 3 Jul 09, CCT repaid S$664m of borrowings, which brought its asset leverage down to 31% from 42% as at 30 Jun 09.
• Maintain Underperform and DDM-based target price of S$0.76 (discount 10.2%). We expect occupancy to continue to weaken in the year, weighed down by weak demand and strong upcoming supply. Over 2010-11, we expect reversions to turn negative for CCT as rents for expiring leases in two of its major buildings Six Battery Road and Raffles City are significantly higher than current market rents
(S$7-8psf), and anticipated future rents (S$5-6psf). We maintain our estimates and Underperform rating as catalysts in the medium term are still lacking.