Suntec – MayBank Kim Eng
Patience Is Bitter, But Its Fruit Is Sweet.
3Q13 DPU to fare better. The worst distribution drag by Suntec City Mall’s (SCM) ongoing renovation works is likely over in 1H13, when Phase 1 new tenants have yet to start paying rentals and Phase 2 old tenants are being vacated for the AEI. Nonetheless, we noted that many Phase 1 tenants (H&M, Uniqlo, Giant, Breadtalk Café , Hans etc.) have begun operations in Jun-Sep, but they are likely to be still on rentfree periods (1-2 mths). We thus foresee modest rental uplift last quarter and forecast 3Q13 DPU at 2.28 SG-cts (+1.5% QoQ; -2.8% YoY) and FY13 DPU at 9.23 SG-cts. (-2.7% YoY).
Look out for progress update on AEI. Pre-commitments for Phase 1 leases in 2Q13 hit 99.6% (96.7% in 1Q13), with average passing rent of SGD13.09 psf/mth. Suntec also reported that 70.1% of Phase 2 NLA in 2Q13 has been pre-committed (prev. qtr 53%). We think pre-commitments for Phase 2 should hit at least 85% in 3Q13. Looking at the intensity of the refurbishment works, overall AEI is making good progress and works should wrap up as scheduled by 4Q14.
Retail Sales holding up. The Singapore Retail Sales Index (excluding motor vehicles) went up 2.5% YoY in both Jun and July. The Food and Beverage Services Index was also up 4% and 2.1% YoY in Jun and Jul respectively. The largest dip in Jul came from recreational goods (-3% YoY) and telecommunications apparatus/computers (-7%). Fast food outlets also suffer a slight dent (-0.2% YoY). We expect retail sales to fare better in Aug-Sep period following the success of the F1 race, with a total of 262,527 visitors at the Marina Bay Street Circuit over the three-day sell-out race weekend (highest attendance since the inaugural 2008 race.) We also noted that turnover rents for Retail REITs constitute only about 2-10% of overall FY11-FY12 gross revenue, which should provide some reprieve in the event of a persistent sales slump, as retails rentals are typically contracted for three years.
DPU top-up possible. Suntec received cash proceeds of ~SGD147m from the sale of Chijmes in 1Q12. So far, it has topped-up SGD2.7m in 1Q13 and SGD7.8m in 2Q13. Looking at the conservative SGD10.5m payout this far, we do not rule out another top-up in 3Q13.
Reiterate BUY. Our investment thesis on Suntec remains in-tact. In this growth-limited environment, Suntec is one of the very few S-REITs that has a DPU CAGR growth of 4% from 2012-2015 (12.7% over three years), following the rental reversions from the major overhaul at Suntec City. Suntec is now trading at forward-yield spreads of 3.2% and P/B of 0.80x Maintain BUY with an unchanged TP of SGD1.90.
FCOT – CIMB
Minimal dilution impact from CPPU conversion
Frasers Commercial Trust (FCOT) recently announced that 9.37m new ordinary units have been issued following the conversion of 11.1m Series A CPPUs. The conversion enlarges FCOT’s share base by c. 1.4%, which will result in marginal dilution for existing shareholders.
As such, we lowered our FY13-15 DPU estimates by around 1.4% to account for the slightly larger share base. We maintain our Outperform rating and see catalysts from the additional hotel GFA at China Square Central, while lowering our target price to S$1.45 to reflect the slight dilution.
What Happened
FCOT recently announced the issuance of 9.37m new ordinary units following the conversion of 11.1m Series A Convertible Perpetual Preferred Units (CPPUs) at a conversion price of S$1.1845/unit.
What We Think
This conversion exercise of CPPUs into ordinary units was largely within expectations as the stock continues to trade above the conversion price of S$1.1845/unit, while the gearing remains at c.39%.
FCOT has been redeeming its CPPUs since Dec12, costing the trust an average yield of 5.5% annually. Together, the two redemption exercises (Dec 12 and Apr 13) took 95.8% of CPPUs off the market, leaving only 14.3m units.
With the latest conversion exercise, only 1.055m of CPPUs-translating to c.890k ordinary shares -are left on the books. We see limited pressure on the stock if these CPPUs are converted into ordinary units.
What You Should Do
We continue to favour FCOT for the additional hotel GFA planning permission at China Square Central. While management continues to evaluate the potential of the 16,000sqm hotel site, we believe this will provide the next boost to FCOT’s books(c.10-15% to book value) as we expect the hotel to be valued at S$300m-S$350m upon completion. We maintain our Outperform rating and target price of S$1.47,which implies a 6% FY14 dividend yield-largely inline with the office REITs’ average yield of 6.2%.
CDL H-Trust – OCBC
Upgrade to BUY on valuation grounds
- Slight RevPAR growth for industry in Aug
- Reasonable entry point
- Upgrade to BUY
Great variance among tiers
Based on STB figures, we estimate that Hotel RevPAR saw a mild growth of 2% YoY to S$232 in Aug. This compares favorably to the overall YoY decline for Jan to Aug of 1.9%. While the growth in Aug is encouraging, we do note that for the month, there was quite some variance in the YoY movement in average room rates between the tiers: Luxury (+9.4% to S$452.10), Upscale (-12.0% to S$264.60), Mid-Tier (+0.4% to S$189.50) and Economy (-7.1% to S$103.90). Similarly, Luxury and Mid-tier were the better performers in terms of RevPAR YoY change: Luxury (+20.1% to S$415.50), Upscale (-11.4% to S$236.70), Mid-Tier (+1.0% to S$170.20) and Economy (-8.1% to S$88.80). CDLHT’s hotels in Singapore are most appropriately classified as being in the Mid-tier/Upscale categories, so it is likely to demonstrate a blend of the performance figures from those tiers. With generally positive sentiment from hoteliers about Sep, we could see stabilization in the sector.
Negative factors more than priced in
CDLHT is 23% below its 52-week peak of S$2.12 on 17 Apr, dragged down by poor sector data points and general concern about oversupply; we forecast that that hotel room supply will expand at 6.5% p.a. over 2013-2015 while hotel room demand will grow at 5.4% p.a. However, we believe that the negative news has been priced in and the current price level offers a reasonable entry point.
Raise FV to S$1.83
Incorporating a risk-free rate of 2.4% (versus 2.7% previously) into our DDM model to reflect lower bond yields, we raise our FV on CDLHT to S$1.83 from S$1.56. On valuation grounds, we upgrade CDLHT from a Hold to a BUY. CDLHT is trading at an attractive FY13 dividend yield of 6.4%, versus 6.9% for its peers. It should be kept in mind that CDLHT has been conservatively paying out 90% of its distributable income, with the remainder retained for working capital. This is in contrast to the 100% being paid out by its peers, i.e. ART, FEHT and OUEHT. Hence a like-for-like comparison would see CDLHT trading at a yield of 7.1% (assuming 100% payout).
ART – OCBC
Eurozone recovery and positive FX movements
- Eurozone is improving
- FX directions should help ART
- Upgrade to BUY
Eurozone’s weak recovery
Business activity in the Eurozone rose to a 27-month high, according to closely-watched data from London-based Markit Economics released yesterday (23 Sep). Germany led the region with good new business and employment gains. Various economic data is pointing towards weak recovery in the Eurozone. Gradually this should translate into better leasing prospects for ART’s European serviced residences.
2Q13 in line with street
To recap, Ascott Residence Trust (ART) reported 2Q13 results that were in line with the street. Revenue fell 2% YoY to S$77.4m due to the divestments and lower contribution from existing properties. RevPAU contracted 9% YoY to S$142 and this was due mainly to the divestment of the Cairnhill property and weaker performance from China and Japan. Gross profit dropped 4% YoY to S$41.0m. However, unitholders’ distribution grew 14% YoY to S$30.9m (including a reversal of over-provision of prior years’ tax expense of S$2.7m), which led DPU up 3% YoY to 2.45 S cents. Excluding the placement units issued in 1Q13, DPU for 2Q 2013 would be 2.70 cents.
Foreign currencies to help gross profit
During the 2Q13 analyst briefing, management expressed that it believed that the whole portfolio’s RevPAU for 2H13 will be flat or slightly higher than 1H13, assuming that exchange rates stay constant for the rest of the year. We analyzed movements in the average spot exchange rates for the various currencies in which ART receives its revenue in. Assuming flat RevPAU/rental income in local currency terms on a HoH basis for 2H13, we note that the overall exchange rate movements for 2H13 so far could actually increase ART’s gross profit by ~1.0% HoH, chiefly due to improvements in EUR and GBP versus the SGD. Assuming no change in the asset values in local currency terms, we estimate a ~0.8% increase in portfolio value. Going forward, ART’s geographically diversified portfolio in this volatile environment will provide some resilience to negative FX movements.
Upgrade to BUY
Since the unit price of ART has fallen 13.4% since we downgraded the REIT on 24 Jan, we believe that ART is undervalued at current levels, with an attractive yield of 7.6% for FY14E. We maintain our FV of S$1.37 and upgrade ART from Hold to BUY.
SB REIT – OCBC
Best proxy to Singapore industrial market
- Best-in-class portfolio properties
- Strong sponsor asset pipeline
- Robust financial position
Initiate coverage with BUY
We are initiating coverage on Soilbuild Business Space REIT (Soilbuild REIT) with a BUY rating. Our fair value of S$0.82 is based on the dividend discount model, and implies an attractive total expected return of 20.1%. At current price, Soilbuild REIT is trading at the steepest discount of 8.8% to its book value, compared to an average P/B of 1.10x seen across its subsector peers. This is
unjustified in our view given Soilbuild REIT’s quality portfolio assets, growth potential and respectable FY14F yield of 7.8%.
Singapore-based industrial landlord with quality assets
Soilbuild REIT currently owns a young portfolio of seven modern business space properties in Singapore which enjoy excellent connectivity. In addition, Soilbuild REIT has the largest exposure to the business park segment relative to the other industrial SREITs. We like Soilbuild REIT’s exposure in this space because demand in the local scene has been growing steadily throughout the years due to its high quality and lower rents relative to traditional office spaces.
Strong sponsorship from Soilbuild Group
The Sponsor for Soilbuild REIT is Soilbuild Group Holdings, a leading integrated property group based in Singapore. It is one of the few Singapore construction companies that are allowed to tender for public sector projects without any value limitations. Given Soilbuild Group’s track record and expertise, we believe Soilbuild REIT is able to leverage on the capabilities of its Sponsor to grow its income.
Clear growth opportunities
Soilbuild REIT is granted Right of First Refusal (ROFR) by its Sponsor over all its income-producing business space assets in Singapore. The ROFR currently covers four industrial properties, providing Soilbuild REIT with a clear acquisition pipeline. In addition, several of its properties have under-utilized plot ratios, and present opportunities for growth. As of the listing date, Soilbuild REIT is sitting at healthy gearing ratio of 29.9%, while 75.0% of its interest rates are fixed. This not only gives Soilbuild REIT ample debt headroom to pursue its growth plans but also limits its exposure to rising interest costs.