A-REIT – DBSV
Value from enhancements
- Commendable 1Q14 results – in line
- New acquisitions, development projects to underpin a steady growth momentum
- Acquisitions if any, will be a positive surprise
- Maintain BUY, TP lowered slightly to S$2.50
Highlights
Commendable 1Q14 results. A-REIT’s 1Q14 results were in line, with gross revenues and net property income growing 6% and 7% to S$150.9m and S$108.0m, respectively. This was largely due to the acquisition of The Galen, supported by an organic uplift in rents. Rental reversions remained positive at c9.6% compared to previously contracted rents while occupancy rates dipped slightly to 93.6% due to conversion of certain singletenanted properties into multi- tenanted properties. Weighted allin cost declined slightly to 3.09% (vs 3.32%) but is expected to remain stable going forward. Distributable income came in 11.3% higher at S$85.2m, translating to a DPU of 3.55 Scts for the quarter (+0.6% due to an enlarged share base).
Recent completions to contribute positively. to earnings. The recent completion of Unilever Four Aces Singapore (a built-tosuit facility) and the acquisition of A-REIT City @ Jinqiao are expected to start kicking in from 2Q14. We note that there is a S$13.5m rental guarantee on the latter, which will mitigate any earnings downside. A-REIT has commenced leasing of the space, which is currently 3% leased with a further 20% of the space under negotiation.
Developments, acquisitions to drive earnings growth in FY14-15F. A-REIT has an active good pipeline of development and asset enhancement projects (AEI), with an additional 3 AEIs at Techquest, LogisTech and Corporation Place unveiled, costing cS$25.4m and will complete in 2Q14. Together with its other developments, A-REIT has an additional S$190.8m in investments (new and uncompleted projects) that have yet to be funded. Growth momentum will pick up from end of FY14F as these projects are progressively completed from 2HCY13. Amongst the development projects, Nexus@one-north, the largest development project in its pipeline (completing in 3QCY13), is seeing improving take-up rates, with reported occupancy of close to 58%.
Recommendation
BUY with revised TP of S$2.50. Our TP is revised to S$2.50 as we raised our risk free rate assumption (2.6% vs 1.8%). We continue to like A-REIT for its stability and attractive yield of c6.1- 6.5%. Upside to earnings will be acquisitions, which the manager is currently reviewing.
.SI Refer to important disclosures
at the end of this report
KepREIT – CIMB
Steady leasing
The key positives in KREIT’s 2Q13 results were the higher leasing at OFC, successful backfilling at Prudential Tower and the proactive refinancing of loans due in FY14. KREIT’s headline yields are high but we see this balanced by its high asset leverage and income support.
KREIT’s 2Q13/1HFY13 DPUs broadly met consensus and our expectations, forming 25%/50% of our FY13 forecast. We tweak our FY13-15 DPUs and our DDM-based target price (discount rate: 8.3%) higher to factor in its recent acquisition. Maintain Neutral.
Flattish DPU growth outlook
Although we expect a DPU uptick in FY14 from KREIT’s Australian acquisitions, long-term growth is likely to be muted due to the expiry of income support. 2Q13’s DPU was up by only 1.5% yoy due to the higher earnings contributions from OFC and KREIT’s Australian acquisitions being offset by the loss of income support at ORQ and its larger unit base post-placement. Qoq, 2Q13 DPU was flat. The key positives in 2Q13 came from a slight increase in OFC occupancy to 97.9% from 96.6%. Prudential Tower remained 100% occupied as management successfully backfilled several departing tenants. However, rental income was negatively hit by the fit-out periods.
Capital management
Management completed the early refinancing of c.60% of its borrowings due in FY14, which raised the weighted average term to expiry from 3.2 years to 3.6 years. Management noted that the interest costs for bank loans have been stable. Asset leverage was a high 44.2% at end-2Q13 and may rise above 45% if the recent Melbourne acquisition is funded entirely by debt. However, management stated that the acquisition would probably be partially funded via equity and expressed confidence in asset values.
Maintain Neutral rating
We factor in KREIT’s recent Melbourne acquisition, assuming 50:50 debt-equity funding. KREIT’s high headline yields remain its key attraction but we see this balanced by its high asset leverage and income.
HPH-Trust – DBSV
Tough times won’t last long
- HK volumes below par YTD, but the worst is over and look forward to better data
- Revised down FY13/14F DPU by 8%/6% given lower volume estimates
- 1H13 DPU could be around 2UScts, should improve in 2H13 in line with trade flows
- Weaker DPU priced in; Maintain BUY with lower TP of US$0.82
Can only get better from here. Volume growth at the Trust’s HIT terminals in HK has been below par so far in FY13, with the port workers’ strike in April adding to the woes. HIT volumes could be down more than 10% y-o-y in 2Q13, with the high base in 1H12 – arising from higher transshipment activities between newly formed liner alliance partners – further skewing the comparison. Yantian Port volumes though remain on course for mid-single digit growth as expected, but overall volumes in FY13 could be flattish, despite contribution from newly acquired ACT terminals in HK. But the worst should be over and even though Europe trade remains weak, US volumes show relatively positive signs and upcoming peak season should provide more visibility for investors. This was the key message that HPHT communicated during our Pulse of Asia investor conference in Singapore recently.
Some key indicators looking up. US payrolls data came in better than expected recently, and while unemployment rate didn’t fall, consumer sentiment is improving and US inventory to sales ratio has maintained its upward momentum, giving us some confidence that trade flows in 2H13 will improve.
Worst is over, good time to BUY. In line with lower volume estimates, we moderate our FY13/14 DPU expectations by about 7%/ 6% to 5.3UScts/ 5.9UScts. Our TP is adjusted down to US$0.82. HPHT share price has corrected significantly in line with market sentiment, and we believe it has more than priced in lower DPU expectations. Maintain BUY in light of healthy yield promise amid the uncertain macro environment. A trade recovery by 2H13 could provide an additional cyclical leverage boost to the stock price.
Cambridge – DBSV
Moving to larger projects
- Divesting Lam Soon Industrial Building at 28% above book value
- Not the optimal sale scenario but deployment of proceeds to be accretive
- TP adjusted S$0.78 as we revert to DCF valuation; Reduce to HOLD
Divesting Lam Soon Industrial Building. Cambridge Industrial Trust (CREIT) announced that it is proposing to divest Lam Soon Industrial Building (or 63 Hillview Avenue) for S$140.8m. The proposed selling price represents CREIT’s 69.4% stake in the strata share value of the property (97 out of 154 free freehold strata units) and is a 28% premium over the latest valued book value. The exit yield is estimated to be c2.3%. The buyer is QF Properties Pte Ltd which is a JV set up by Enviro-Hub Holdings Ltd (listed on SGX) and BS Capital, a wholly owned company of its chairman, Mr Raymond Ng.
Not the optimal sale scenario but proceeds can still be utilised accretively. After two unsuccessful lengthy enbloc sale attempts aimed at maximizing the value of the property, the manager has chosen to exit through the sale of its entire 69.4% stake to a single buyer, rather than holding on to its investment or through a strata-sale on a piecemeal basis. Despite settling for a lower selling price, the manager would be able to efficiently deploy proceeds to higher yielding sources (repay debt, which saves CREIT c3.5% p.a. or part fund its various development projects which returns c 7.5%-8.0%) compared to the c2.9% from Lam Soon Industrial Building based on its book value. In addition, we view that a strata-sale process is not optimal given that it is likely to be a lengthy process coupled with uncertainty regarding the eventual sale of its entire stake.
Downgrade to HOLD, TP S$0.78. Our DPU/NAV estimates are revised slightly to account for the lower than projected sale value. We have also switched our valuation methodology back to DCF compared to SOTP previously where we had factored in the full potential of an enbloc sale and development of its portfolio. Our new DCF-based TP is S$0.78. We continue to like management for their ability to unlock value from their assets and believe this activity would likely continue over time. However, in the near term, we see lack of near term catalyst for outperformance in view of the execution of this sale. Stock price have held up fairly well in the recent market sell-down and given the current limited total return upside, we are cutting our call to a HOLD.
A-REIT – OCBC
UNDER-RATED INDUSTRIAL BLUE CHIP
- Value emerges amid recent sell-off
- DPU and book value to remain stable
- Completed investments to add to income
Valuations looking compelling now
We are turning positive on Ascendas REIT (A-REIT). Its unit price has fallen by 22.7% from its peak of S$2.86 on 15 Apr (FTSE ST REIT Index: -14.9%), due partly to concerns on an early tapering of US Federal Reserve’s quantitative easing programme and accompanying hike in interest rates. At present, A-REIT is trading at 1.14x P/B, even lower than some of its peers’ P/B ratios in the industrial REIT space, which are hovering around the 1.2x mark. In addition, A-REIT’s forward DPU yield of 7.2% is comparable to the subsector average yield of 7.5%. This is despite the fact that A-REIT is the largest Singapore-listed industrial landlord by market cap and portfolio size (102 properties diversified across all property types), which should trade at a premium to its counterparts in our view.
Limited impact on DPU and book value
Based on our analysis on interest rates, we believe that the impact on A-REIT’s DPU and book value is likely to be limited, as a considerable 74.8% of its total debt is fixed and the weighted average term of debt is a long 3.9 years. Specifically, we estimate that a 1ppt increase in interest costs may likely lead to a 1.5% drop in our FY13F DPU – still within our comfortable range. We also observe that the cap rates for A-REIT’s portfolio has been tracking around circa 6.6%-7.4%, or at a relatively tight spread of 80bps, over 2008-12 despite the credit crunch. Hence, we believe that A-REIT’s asset values are likely to remain largely stable even if the rates face upward pressures.
Upgrade to BUY
A-REIT’s DPU is backed by healthy leasing demand and rental rates (positive rental reversions likely to persist in FY14, albeit at slower pace). A number of A-REIT’s committed investments are also expected to complete within the year, and will contribute positively to its FY14 rental income. We revise our fair value from S$2.63 to S$2.45 to reflect current higher risk-free rates but upgrade A-REIT from Hold to BUY on attractive upside potential.