FCT – CIMB
Refinancing savings
As we have been highlighting refinancing savings as a potential catalyst for some time,FCT’snew MTN issuance wasn’t unexpected. Still, the good rates it securedwerea nicesurprise. We continue to like its resilient suburban retail exposure.
We raise DPUs and DDM-based target price (discount rate:7.9%) to factor ininterest cost savings on refinancing. Maintain Outperform, with other catalysts expectedfrom stronger contributions from Causeway Point’sAEI and Northpoint.
What Happened
FCT has issuedtwo new MTNs (S$70m at 2.3% due 2015 and S$30m at 2.85% due 2017). Proceeds will be used for therefinancing of existing short-term borrowings, AEI, investments and working capital.
What We Think
We expect part of the proceeds to be channelled tothe refinancing of its S$75m MTN due in FY12. We expect refinancing savings,given a fairly high interest cost of 4.8%. We have been highlighting this catalyst for some time though the good rates secured still came in as a slight surprise. Further positives werea slight lengthening of debt maturity. Savings are,however,small at 2% of FY13 DPU, given the small size of the loan (14%of total borrowings).
Meanwhile, we expecttheremaining S$25m to be used for thefunding of an impending rights issue by Hektar REIT. FCT owns 31% ofHektar REIT(trading at consensus forward DPU yields of 7.3%), which recently obtained approval for arights issue to fund the acquisition of two retail assets in Malaysia.
What You Should Do
The overall impact is marginal,given the small size of the loan. Maintain Outperform for FCT’s suburban retail exposure. We see catalysts from stronger-than-expected contributions from Causeway Point’sAEI and Northpoint.
FCOT – OCBC
MAKING GOOD PROGRESS
•Expecting improved performance
•Positive move to divest KeyPoint
•Valuations still undemanding
Outperformer in S-REIT space
Frasers Commercial Trust (FCOT) has emerged as the top performer in the S-REIT space YTD given its expected improvement in operating performance and financial position. The REIT’s acquisition of the remaining 50% stake in Caroline Chisholm Centre in Australia, which had been completed on 13 Apr, is expected to contribute positively to its DPU and strengthen its portfolio lease expiry profile. In mid-May, FCOT jointly announced the China Square Precinct Master Plan with Far East Organization and The Great Eastern Life Assurance, which will enhance the traffic and connectivity of the downtown heritage area, including China Square Central (CSC). This will likely enable FCOT to better position CSC for quality tenants and ultimately benefit from yield optimization, now that FCOT has taken over management of the asset following the expiry of master lease.
Divestment of KeyPoint a plus
FCOT had also announced the proposed sale of KeyPoint on 24 Apr, much to the market’s anticipation. The sales consideration was at S$360.0m and represents a 26.3% premium over the property’s latest valuation of S$285.0m (NPI yield at 3.11%). We see several positives from the divestment, especially when the proceeds are used to pare down its borrowings or even redeem its CPPUs (Convertible Perpetual Preferred Units). First, it is expected to alleviate the heat on its aggregate leverage (currently close to 40%), hence providing it with greater financial flexibility for future investment opportunities. Second, FCOT may be able to refinance its debts at more favourable terms, as its financial position is now stronger. Furthermore, interest expenses are likely lower from lower outstanding debts.
Maintain BUY
We continue to like FCOT for its growth potential, proactive management and respectable FY12F DPU yield of 7.3%. Amid the positive outlook, we expect FCOT’s performance to be sustained (valuations undemanding at 0.7x P/B). We are holding off adjusting our estimates as the divestment of KeyPoint is subject to unitholders’ approval. Maintain BUY with unchanged fair value of S$0.97.
PCRT – CIMB
Looking past the rough patch
The recent sell-down has lifted dividend yields to attractive levels of 8-10% till 2014. We believe negatives have been priced in. While teething difficulties are here to stay, near-term weakness is mitigated by growth opportunities on the back of a more robust trust structure.
Long term prospects remain attractive when revaluation gains kick in to boost NAV growth. We maintain Outperform on an unchanged target price (still at 35% discount to RNAV). Strategic monetisation of assets and stronger-than-expected leasing progress are potential catalysts.
Attractive dividend yields
While we remain watchful of operational difficulties on the ground, strong dividend yields buffer weaker earnings as malls go through the gestation phase. Negotiated earn-out structures are sufficient to guarantee a minimum of 8-10% dividend yields till 2014, providing 1-3 years of buffer time for malls to stabilise. Factoring in more conservative rental growth estimates, we anticipate a decent portfolio yield-on-cost 0f >6% when earn-out structure tapers off. We look forward to the 2014/15 turnaround, with strong NAV growth when revaluation gains kick in, and self-sustaining dividend yields of approx. 6% on cash-generative assets.
Robust trust structure: better equipped for growth
Despite the Apr 2012 sell-down of shareholdings by key local partner, we see Mr. Kuok’s buy-in as reducing over-reliance on any single partner, and establishing greater certainty of a pipeline of retail assets for PCRT via: (1) establishment of joint-investment vehicle (Mr. Pua/Mr. Kuok) with target capital of S$500m, providing additional firepower to PCRT’s sponsor; and (2) alignment of interest between sponsor and business trust with the increase in Mr. Kuok’s shareholding in PCRT from 5% to 16.9% (deemed interest).
Potential monetisation; compelling valuations
Management has indicated the possibility of monetisation of assets, at the right price. With retail assets in Tier 2 cities transacted at Rmb20,000-30,000psm in 2011, we see potential RNAV uplift from strategic divestments. With the stock trading at 0.7x P/BV (CRCT: 1x P/BV) and 50% discount to RNAV, we see value at the current share price of S$0.45 vs. Mr. Kuok’s Apr 2012 off-market purchase price of S$0.446 per unit.
CRCT – OCBC
GROWING PIE FOR PHYSICAL AND ONLINE RETAIL
•Acceptable May retail sales
•Rise of online retail…
•…but physical channels will grow fine
Reasonable May retail sales
Data released on Saturday shows that China’s retail sales grew 13.8% YoY in May to RMB1.67t, slightly down from the 14.1% growth in April and lower than economists’ expectation of a 14.2% rise but still acceptable. Adjusted for inflation, May’s figure was up 11% YoY. For the first five months of this year, retail sales totaled RMB8.16t, up 14.5% YoY (10.9% YoY in real terms). China’s rate cut last Thursday had already caused many to anticipate disappointing economic data over the weekend. Inflation slowed to 3.0% in May from 3.4% in April, which should give the central bank more leeway to enact further interest rate cuts. We believe that domestic demand could be boosted starting in 3Q12.
Growth in online retail…
According to the Ministry of Commerce, China recorded 194 million online shoppers and RMB782.56b in online retail trade last year. The sales were 53.7% higher YoY and accounted for 4.3% of China’s total consumer goods retail volume in 2011. The importance of the online channel is increasingly recognized by retailers. In Feb, Walmart increased its stake in Yihaodian, the biggest online grocery retailer in China, to 51%. Department store retailer Neiman Marcus invested in the Glamour Sales site in March. In May, Macy’s invested in online retailer VIPStore, which operates jiapin.com.
…but physical retail will do well
Even if online retail sales continue to grow at 50% p.a. through till 2015 and total retail sales grow at a conservative 10%-15% p.a., physical retail sales can grow at a healthy 7-12% p.a. Among real estate investments, retail is quite heterogeneous, whereby differentiation and strong execution are key. We have confidence in CRCT’s operational capability given its manager is a wholly-owned subsidiary of CapitaMalls Asia.
Maintain BUY
We maintain our BUY rating on CRCT and S$1.44 fair value. CRCT is trading at an attractive FY12F dividend yield of 7.4%.
CLT – OCBC
IN THE RIGHT DIRECTION
•On track to deliver solid results
•May benefit from lower interest costs
•Offers attractive FY12F DPU yield
Expecting sturdy FY12 performance
Cache Logistics Trust (CACHE) appears to be on track to deliver a sturdy set of results for FY12. In addition to strong and predictable income streams from its existing portfolio properties, the REIT had announced two new acquisitions YTD that are expected to contributive positively to its financial performance. We note that the acquisition of Pan Asia Logistics Centre, announced in Jan, was completed on 30 Apr and is expected to give an initial NPI yield of 7.7%. On 7 May, CACHE proposed a sizeable acquisition of Pandan Logistics Hub from its sponsor CWT Limited at S$66m (~8.5% of total asset valuation as at 31 Dec 2011). This property incorporates a 2.5% annual rental escalation and has an initial NPI yield of 7.6%, based on details on the master lease arrangement with CWT. As the implied portfolio NPI yield stood at 7.3% for FY11, both acquisitions are expected to be accretive to its earnings.
Possibility of lower borrowing costs
We also observe that CACHE had announced the redemption of its S$35m 3.5% fixed rate notes due 2016 on 31 May. This is somewhat unexpected in our view, as the date of maturity is still four years away and as CACHE clearly need the capital for growth. This leads us to believe that CACHE may be in the process of injecting new capital via borrowings at more favourable terms (equity issue is probably an unlikely scenario at this juncture given its comfortable aggregate leverage of 27.7% as at 31 Mar). Should this turn out to be true, we expect CACHE to benefit from interest savings.
Maintain BUY
We continue to like CACHE for its resilient portfolio (100% occupied; master lease arrangements), long WALE of 4.4 years and attractive FY12F DPU yield of 8.1%. We are currently holding off adjusting our estimates for the Pandan Logistics Hub acquisition as it is still subject to unitholders’ approval on 19 Jun. Maintain BUY with unchanged fair value of S$1.11.