KGT – AmFraser
Revenue dragged down by absence of construction revenue. KGT’s FY13 revenue was 12% lower YoY, which was largely the result of the exclusion of construction revenue arising from the flue gas treatment upgrade. Revenue from operation and maintenance (O&M) was S$50mil for FY13, which was S$0.3mil lower than FY12, due to lower output from the waste-to-energy plants and NEWater plant. This was partially offset by annual adjustment of O&M and power tariffs.
7.4% yield masks a partial return of capital. KGT’s DPU of 7.82c per unit translates into a yield of 7.4%. We continue to urge investors to look beyond the advertised yield as it masks a partial return of capital from the gradual decline in service concession receivables. KGT’s service concession receivables represent the right to receive fixed and determinable payments from the NEA and PUB.
NAV declining. To put things into perspective, KGT’s NAV continues to be on the decline and currently stands at S$1 per unit. As at Dec 12, KGT’s NAV stands at S$1.05.
Current level of distributions not sustainable. KGT’s concession agreements on its Senoko Plant, Ulu Pandan Plant and Tuas DBOO Plant end in 2024, 2027 and 2034 respectively. As these concession agreements expire, KGT will witness a step-down in its overall distributions. We project KGT’s DPU to decline to 2.25c in FY25 following its first concession expiry.
Maintain SELL. With a true free cash flow yield of merely 2.4%, KGT certainly does not warrant as a compelling yield investment, in our view. The trust’s declining NAV, short remaining concession lives of its assets as well as its low true free cash flow yield are our key concerns. We maintain our SELL recommendation on KGT with a target price of S$0.72.
Cambridge – CIMB
Year of repositioning
CIT’s 4Q13revenue and NPI growth came in at -3.1% yoy and +1.8% yoy respectively. These results translate into 24% and 25% of our respective 4QFY13 estimates. Together with the previous 9M earnings, full-year revenue and DPU were in line with our expectations, meeting98% and 99% of our respective FY13estimates.Given another proactive year ahead (in terms of managing and repositioning its portfolio) coupled with interest savings and a strong balance sheet, we maintain our Add call with an unchanged DDM-based target price (discount rate: 8.2%) of S$0.80.
A respectable set of results amid a tough year
Cambridge Industrial Trust (CIT) just announced its 4Q13 results with revenue and DPU being reported at S$23.3m (-3.1% yoy) and 1.25S¢ (+1.8% yoy) respectively. In FY13, gross revenue increased by 8.4% to S$96.5m while NPI rose to S$80.4m (+5.5%). During the said period, CIT completed four acquisitions totalling S$92.7m, commenced two AEIs totalling S$58.2m – both on track for completion in 4Q14 – and divested three non-core assets totalling S$45.4m. Occupancy for its portfolio remained high at c.97%.
Defensive balance sheet
During 4Q13, CIT entered into S$250m of interest-rate swaps to fixed interest rates, with all-in cost reduced to 3.6% per year (from 3.9%) and 83% of debt under a fixed rate for the next two years. Through this exercise, we expect CIT to save c.S$7m in interest over FY14. CIT has a healthy balance sheet currently, with a leverage ratio of 28.7% and no major refinancing due till Jun 2016.
Strong REIT but slight concern with change of CEO
In our view, through proactive management of both assets and capital, CIT has become a stronger REIT and is well positioned for any acquisition opportunities. In addition, with limited refinancing needs in 2015 (S$50m), CIT is well shielded from any potential rise in interest rates over the next two years. Looking ahead, we expect CIT to divest a further 2-3 non-core assets while, at the same time, completing two more acquisitions and two AEIs. However, the resignation of the CEO, Mr Chris Calvert (without a clear successor), may put short-term pressure on the share price as the market awaits further information. Maintain Add.
A-REIT – CIMB
Positivity dampened
AREIT 3QFY14 revenue rose by 6.4% yoy while DPU fellby2.2% yoy.9MFY14DPUaccountedfor 77% of our FY14 forecast. As the industrial market in Singapore remains challenging and the rental market is expected to slow due to the high supply, we have lowered our FY14/15 revenue forecast by 1.4% and raise our risk-free rate by30bp to 3.7% to account for a higher interest rates environment. Maintain Hold rating with a slightly lower DDM-based (discount rate: 7.7%) target priceof S$2.36.
Stable set of results
Ascendas REIT (AREIT) recently reported 3QFY14 revenue of S$154.4m (+6.4% yoy) and DPU of 3.54Scts (-2.2% yoy) as a result of the dilution from the 160m unit placement in Mar 2013. The higher revenue was mainly attributed to the additional contribution from The Galen, Nexus@one-north and A-REIT City@Jinqiao, as well as the positive rental reversions on renewal. AREIT’s portfolio occupancy was 89.7% in 3QFY14, slightly lower than the 90.1% in 2QFY14 due to the addition of c.25,000 sq m from its newly acquired properties and completed AEIs.
Change in management fee structure
AREIT announced that it would change the structure of both its base and performance fees in favour of unitholders. Under the new structure, effective from FY14/15, base fees will be adjusted to 0.5% of deposited properties less derivative assets and investment properties under development. On the other hand, performance fees will ensure that unitholders will enjoy a minimum 2.5% growth in DPU if Tier 1 fees kick in or 5.0% if Tier 2 fees kick in (Figure 5).
Maintain Hold due to challenging market
We remain cautious on the outlook for the industrial property sector, particularly for the business and science parks, and the high specification segment. These segments comprise 54% of AREIT’s portfolio. The business and science parks are expected to add 219,000 sq m (58% pre-committed) to FY14 supply, while the latter segment will add 228,000 sq m (64% pre-committed). Thus, we lower our FY14/15 revenue forecast by 1.4% and raise our risk-free rate by 30bp to 3.7% to account for a higher interest rates environment. Maintain Hold with a slightly lower DDM-based target price of S$2.36.
OUE C-REIT – Lim & Tan
OUE Commercial Real Estate Investment Trust (OUE C-REIT) is launching its IPO at an offer price of S$0.80 per unit. We highlight the key considerations below for investors.
Portfolio
- The initial portfolio of OUE C-REIT comprises two commercial properties, namely OUE Bayfront and Lippo Plaza that are located in Singapore and Shanghai with an aggregate GFA of about 105,296.1 sq m and a total appraised value of S$1,623.6 mln as at Sept 2013. The overall committed occupancy rates for the OUE Bayfront and Lippo Plaza were 96.1% and 88.2% respectively.
Sponsor
- OUE C-REIT is backed by OUE – a diversified real estate developer owned by Indonesia's Lippo Group. The Sponsor will hold a 45.2% stake in OUE C-REIT post-listing (assuming the Over-allotment Option is exercised in full). The sponsor has also granted a right of first refusal (ROFR) over its income-producing properties including i) One Raffles Place; ii) OUE Downtown 2 and Downtown Gallery and iii) U.S. Bank Tower. This will provide OUE C-REIT with access to a visible acquisition pipeline and increase its IPO portfolio GFA to over 4.5 times when acquired.
Yield & Valuation
-
We note that the Sponsor will provide income support to OUE C-REIT for a period of 5-year from the listing date. Based on the offering price of S$0.80, this translates to:
FY14 projected yield: 6.80%
FY15 projected yield: 6.89%
Discount to NAV: 23.9%
- Aggregate gearing / Avg cost of debt H" 42.3% / 2.5% per annum
Use Of Proceeds
- The total gross proceeds of about S$346.4 mln will be mainly used for the acquisition of the IPO Portfolio, repayment of the Existing Offshore Facilities, refinancing the Existing Onshore Facility, transaction costs as well as working capital purposes.
Our View
- Despite the high headline yield, we note that FY14 and FY15 distribution yield would have been lower at 5.56% and 5.75% respectively if excluding the effects of the income support arrangement. Moreover, with interest rates set to rise, we could see higher borrowing cost when most of its debts mature in 2017. In our view, this could partially offset any potential growth in DPU.
- We are also concerned with its relatively high gearing ratio of 42.3% as OUE C-REIT may have to resort to equity fund raising either in the form of a rights issue or private placements for any future acquisitions.
Key Risks
- Downside includes concentration risk i.e heavily reliant on OUE Bayfront for about 67% of its gross revenue; non-renewal of leases/loss of key tenants/negative rental reversion as well as borrowing limitation.
Cornerstone Investors
- Summit SPV, Mr Gordan Tang, Mdm Chen Huaidan, Mr Yang Dehe and RHB Asset Management
IPO Statistics
Offering Size: 208mln Units (subject to Over-Allotment Option), comprising a Placement Tranche of 151.75 mln Units and a Public Offer of 56.25 mln Units
Offer Price: S$0.80 per Unit
Offering Opens: 17 Jan 2014, 5pm
Offering Closes: 23 Jan 2014, 12pm
SGX-ST trading
Commencement: 27 Jan 2014, 2pm
A-REIT – OCBC
Maintaining stable outlook
- 3QFY14 DPU down 2.2% YoY
- Positive revisions of 9.7% achieved
- Aggregate leverage robust at 30.7%
3QFY14 results within expectations
Ascendas REIT (A-REIT) reported 3QFY14 NPI of S$108.6m and distributable income of S$85.1m, up 3.7% and 4.9% YoY respectively. The growth was mainly due to higher rental income from The Galen, contribution from Nexus@one-north and A-REIT City@Jinqiao, and tax-exempt finance lease income received from a tenant. DPU for the quarter eased 2.2% YoY to 3.54 S cents due to a larger unit base, but was within our expectations given that 9MFY14 DPU of 10.69 S cents formed 75.6% of our full-year DPU forecast (75.3% of consensus).
Leasing activities remained healthy
As management has previously guided, the portfolio occupancy fell marginally from 90.1% in Sep 2013 to 89.7% due to non-renewal of tenants and a 1.7% increase in NLA following the completion of asset enhancement initiatives (AEIs) at 1 Changi Business Park Ave 1 and Techplace II. Nevertheless, leasing demand remained in the positive territory in our view, as A-REIT has continued to reduce its lease expiries (5.3% of FY14 rental income left for renewal vs. 10.5% a quarter ago). In addition, positive rental reversion averaging 9.7% was still achieved for the quarter. While there could be further transitory occupancy pressure for the rest of FY14, A-REIT maintains that positive reversions are still expected, while upside in NPI is possible as the vacant spaces are leased out in due course.
Maintain BUY
A-REIT also proposed some changes to its fee structure – a move we view positively as it would reduce the fee payable to the REIT Manager in favour of unitholders with effect from FY15. In addition, A-REIT will make distributions on a semi-annual basis to align with the payout from its China properties (currently on semi-annual distribution) and reduce the volatility seen in its quarterly DPU. For the quarter, A-REIT announced one new AEI – S$44.6m rejuvenation work at The Alpha. Aggregate leverage is expected to remain healthy at 30.7% after funding the committed investments. We are keeping our FY14 forecasts unchanged as the results were within view. However, we trim our fair value from S$2.45 to S$2.40 on higher equity risk premium. Maintain BUY.