ART – OCBC
HOLDING ITS OWN
- 5.1% SG supply CAGR for 2012-2014
- Change in corporate contract pattern
- Preferred locations
Upcoming serviced residence supply
According to CBRE, an estimated seven serviced residences with approximately 783 serviced residence units are expected to enter the Singapore market by the end of 2014. This would bring the potential supply to over 5,765 units by 2014, representing a 5.1% CAGR on 2011 figures. While this is higher than the rate at which hotel room supply is expected to grow over the same period (4.6% p.a., see our CDLHT report dated 27 Aug), we note that occupancy rates for serviced residences is Singapore are stronger than for hotels in general. Serviced residences clocked average occupancy of 91.8% for 2011 (CBRE), versus an average of 86% for hotels (STB), and thus should be able to deal better with increased supply.
Different contract signing pattern
ART’s Singapore properties were responsible for 18.7% of 1H12 gross profit. Having spoken to management previously, we understand that given the current uncertain economic environment, some corporate are effectively staying for the same duration as they did previously in the Singapore properties although they are renewing shorter contracts as opposed to signing longer contracts. While this may partially reduce visibility for ART, we note that higher average rates can be charged because of the shorter contracts.
Good locations
We believe that ART’s Singapore properties will hold their own against upcoming serviced residence supply given their high quality, branding and good locations. Somerset Liang Court and Citadines Mount Sophia are in districts which are not forecasted to see any additional supply between 2012 and 2014. While Dorsett Residence, to be located next to the Outram Park MRT, will provide some competition to Ascott Raffles Place, the latter has the superior location in the heart of the CBD. Given the Additional Buyer’s Stamp Duty, which was announced in Dec 2011, we expect that more non-residents may end up staying in serviced residences over time as opposed to buying their own residential units.
Maintain BUY
We reduce our fair value from S$1.34 to S$1.30 to reflect a weaker Euro but maintain our BUY rating.
StarHill Global – OCBC
Valuations still attractive
- Extended debt duration
- Neutral outcome for appeal
- Growth profile intact
Refinancing of loan facility
Starhill Global REIT (SGREIT) recently entered into an agreement with its lender ANZ Bank for a A$63m term loan maturing in June 2017. We understand that the new facility will be used to refinance its existing A$63m loan (due to mature in Jan 2013) taken up by SGREIT in Jan 2010 to partially fund the acquisition of David Jones Building. The new facility will be secured under similar arrangements as its existing facility. Based on our estimates, SGREIT’s weighted average debt maturity will likely be extended from 1.8 years to ~2.0 years as at end Sep.
Toshin dispute to be resolved through mediation
In a separate announcement, SGREIT also updated the outcome of its appeal relating to the master lease with Toshin Development Singapore. According to management, the Court of Appeal did not find that the rent review mechanism had been rendered inoperable, as SGREIT had previously declared. However, the Court acknowledged that Toshin did not act in good faith in agreeing on the prevailing market rental values during the early stages of the review exercise. Hence, the Court ordered both parties to jointly request the President of Singapore Institute of Surveyors and Valuers to appoint three valuation firms to determine the prevailing market rental rates. Our take on this development is neutral, as we have not factor in any rental upside resulting from a favourable outcome. But we note that SGREIT has achieved its motive of sending a strong signal to the valuers to exercise independence on the review process.
Retain BUY with unchanged fair value of $0.79
We continue to like SGREIT for its healthy financial position (aggregate leverage of 30.5%), compelling P/B of 0.85x, and growth potential. In our view, SGREIT has yet to reap the full impact of its asset enhancement initiative on Wisma Atria, which is expected to be realized in the upcoming quarters. We now adjust our forecasts to reflect the refinancing activity. Our fair value stays unchanged at S$0.79. Maintain BUY.
Fortune – OCBC
DISAPPOINTING HK RETAIL SALES IN JUL
- Poor HK retail sales in Jul
- Easier visa policy for Mainlanders
- Maintain HOLD
HK Jul retail sales below expectations
In Jul, HK retail sales climbed 3.8% YoY by value, significantly lower than the median 9.0% forecast of five economists surveyed by Dow Jones Newswires and the YoY increases from Jan-Jun, which varied between 8.7% and 17.1%. Jun retail sales had grown 11.0% YoY. A government spokesman attributed Jul’s slow growth to the external economic environment and more cautious local consumer sentiment. Retail sales growth could be more moderate in 2H12 than 1H12 and this will reduce the extent of possible rental increases.
New visa policy could increase PRC visitor numbers…
The Chinese government has announced a change in the Individual Visit Scheme, whereby non-residents living in Beijing, Shanghai, Guangzhou, Shenzhen, Tianjin and Chongqing are able to apply for passports and visas to HK, Macau and Taiwan starting from 1 Sep 2012. Currently, people need to return to the area that issued their residency permit (hukou) to apply. The six cities have substantial nonresident populations. Shenzhen reportedly has a non-resident population of 4.1m, of which many are thought to be migrant workers with mass-market consumption patterns – which suits FRT’s positioning.
…but PRC arrivals account for only 19% of retail sales
For the first seven months of the year, overall visitor arrivals to HK climbed 15.2% YoY to 26.7m. In particular, arrivals by visitors residing in the mainland increased 22.6% YoY to 18.8m. Residents of mainland China spent HK$78,792m on shopping in 2011. Based on this, we estimate that mainlanders accounted for only 19.4% of the HK’s total retail sales in 2011, so additional arrivals due to the visa policy will not necessarily be a panacea. For suburban mall operators like FRT, local consumer sentiment will still be a more important driver for positive rental reversions. We calculate that visitor arrivals as a whole accounted for 24.4% of 2011 retail sales.
Maintain HOLD
We maintain our fair value of HK$5.33 and HOLD rating.
PLife – CIMB
The dust has settled…what next?
We caught up with management post the listing of IHH. Discussions revealed that management has grown more positive and is gearing up for acquisitions, particularly in Malaysia. A new asset-recycling initiative in Japan strengthens long-term organic growth.
We defer the bulk of balance acquisition projections to 2013, lowering FY12-13 DPU estimates, but peg 2% growth to its Japan portfolio. DDM target price rises on lower 7% disc. rate (7.4% previously) as we align risk premium to peers. The stock now trades at 5% yield and 30% premium over book; downgrade from Outperform to Neutral.
First entry into Malaysia
Having raised Australia and Malaysia as potential markets, management took its maiden step into Malaysia through a small S$6.45m acquisition, completed Aug 2012. We expect further acquisitions of Malaysian hospitals (priced at bite-size amounts of S$10m-30m each, from 3rd party or IHH) and believe total c.S$200m of acquisitions will provide DPU uplift of c.4%. Despite almost S$250m headroom to 45% gearing, we note flexibility for mixed funding as the gap between debt and equity funding has narrowed.
Portfolio still going strong
Outside of acquisitions, we estimate 2-4% minimum DPU growth on CPI-pegged leases of Singapore hospitals (60% of rev) alone. In Japan, management unveiled AEI collaboration with operator, paving the way for further enhancements and a new asset-recycling initiative. We view the latter as a compelling strategy for long-term growth as PLife monetises mature and non-core assets, which are replaced by pipeline assets with more growth potential.
On a portfolio basis, medium- to long-term plans include an increase in exposure to revenue-sharing arrangements to capitalise on strong growth in healthcare markets. With a significant proportion of portfolio on CPI-pegged leases, the shift mitigates future normalisation of CPI rates.
Premium valuations
We like PLife for its defensiveness and remain confident of accretive acquisitions. We see PLife as a good yield-play complement to IHH’s growth story. That said, the market has rewarded the stock with a handsome defensive premium, in our view. At 30% premium over book and yield compression to 5%, we struggle to see significant upside. Earlier-than-expected acquisitions will be a re-rating catalyst.
MLT – Kim Eng
Capital Recycling to Bear Fruit
Capital Recycling. MLT has recently announced that it will be acquiring Hyundai Logistics Centre (HLC) in South Korea at SGD24.3m with an initial NPI yield of 9%. It will also be divesting 30 Woodlands Loop in Singapore (FY3/12 NPI yield-on-cost of 6% according to our estimates) at a sale consideration of SGD15.5m, booking a net disposal again of ~SGD4.96m. Both transactions will complete by 3QFY3/13 and Feb 2013 respectively. Gearing is expected to increase marginally to 37.2% upon completion of both transactions.
Our estimates. HLC is currently leased to E-Land World and ENVICO. We expect the acquisition to complete by Oct 2012 and have factored in modest rental escalations of 1.5% p.a. At existing 1QFY3/13 portfolio yield of 6.5%, we think this acquisition will be yield-accretive. We revise our DPU estimates by 0.3%-0.5% over FY3/13-FY3/16.
Still the highest WALE in the industry. MLT’s assets have increased by almost ninefold since the company listed in July 2005. Given its larger asset base, we expect further scale advantages ahead. MLT also has one of the industry’s highest weighted average lease expiry profiles (six years vis-à-vis AREIT’s four years). Despite having exposure to seven overseas markets, Singapore Japan and South Korea (tier-1 mature markets) constitute 76.3% of revenue and 76.4% of NPI in FY3/13 and 78% of our FY3/13 GAV, which should prove defensive in volatile markets.
Yields can be compressed by another 53bps. From our estimates, the implied cap rate for MLT (based on 1QFY3/13 results) is 6.09%. If we take this cap rate as the floor for FY3/13 DPU yield, we believe yields can still be compressed by another 53 bps from our forecasted FY3/13 DPU of 6.6%. This dovetails neatly with our DDM-derived TP of SGD1.17. We are confident that MLT’s stable assets and rental income resilience will help it navigate the choppy waters ahead. Reiterate BUY.