FCT – CIMB
Fine end to a record year
FY11 ended on a high note for FCT, aided by a rebound in occupancy and rental reversions from a partially-refurbished Causeway Point. We continue to like its resilient suburban retail exposure and seethe refurbishment of Causeway Point as a key game-changer.
FY11 DPU was spot on for us though slightly above consensus. 4Q11 DPU forms 28% of our estimate on stronger Causeway Point contributions. We raise our DPU estimates and DDM-based target price (discount rate 8.4%) on lower interest costs. Maintain Outperform.
Positive rental reversions; strong occupancy
We expect a further pick-up in occupancy at Causeway Point and positive rental reversions. 4Q was marked by a sharp recovery in occupancy there and rental reversions (8.6% for FY11, 7.9% for 4Q11, 7.2% for FY10) for its portfolio. Occupancy at its other assets also held up above 95%.
Causeway Point a potential game-changer
Having gone through the most intensive period of AEI with good rental reversions for refurbished space, Causeway Point could change the game for FCT in FY12. Occupancy surged to 92% from a trough of 69% in 2Q and is expected to sustain above 90% in FY12. With 65.5% of the refurbishment completed, work should henceforth be less disruptive, given its progression to higher levels.
Pleasant surprise from lower costs of borrowing
Interest cost savings should continue. Management refinanced its S$260m 4.12% p.a. CMBS in July and hedged this at a low interest cost of 3.09%. This brought effective borrowing rate down to 3.0% from 3Q’s 3.8%. Refinancing of its S$75m MTN due in 2012 should generate further savings, given a high cost of 4.8%. After the drawdown for the Bedok Point acquisition and revaluation of its portfolio, asset leverage was a healthy 31%.
ART – DBSV
Still going strong
At a Glance
• 3Q DPU of 2.23 Scts in line (YTD 3Q 77% of estimates)
• 4Q11 performance could moderate sequentially from a seasonally weaker quarter in Europe
• BUY Call maintained, TP S$1.34 based on DCF
Comment on Results
3Q11 DPU of 2.23 Scts in line. Revenues and gross profits grew by 57% and 89% to S$73.0m and S$40.0m respectively, largely fueled by revenues from 28 serviced residences acquired in Oct’10 which offset the loss of income arising from divestments. On a same store basis, topline was S$0.5m (or 1% lower) due to weaker Japan & Vietnam, offset by strong Singapore operations. Portfolio wide RevPAU increased 11% yoy to S$146/night. NPI margins improved to 55% (vs 45% a year ago) mainly due to the inclusion higher-margin master leases and an improvement in RevPAU portfolio wide. Distributable income came in 112% higher yoy at S$26.3m lifted by interest savings from refinancing activities. DPU grew by only 21% to 2.33 S cts on a larger unit base.
4Q11 to moderate sequentially. Portfolio performance has remained fairly consistent and strong since the beginning of 2011 with Singapore and London continuing to enjoy the after effect of the group’s refurbishment works supported by strong underlying demand for rooms. Both markets saw RevPAU hikes in excess of 11% and other markets remained relatively stable. Its Japan’s operations also came off its low with 23% qoq improvement in RevPAU. Looking ahead, we understand demand for rooms will continue to remain strong, but performance will moderate slightly in 4Q on a sequential basis as Europe moves into a seasonally weaker quarter (where guests profile mix is largely lower-yielding leisure guests).
Un-locking value at Somerset Grand Cairnhill
could be re-rating catalyst, BUY TP S$1.34. We believe a divestment of Somerset Grand Cairnhill Singapore is likely if it is to be redeveloped. This transaction will unlock value for ART, empower the REIT with firepower to make opportunistic acquisitions. ART trades at an attractive 0.8x P/BV and offers FY11-13F yields of >8.5%.
MLT – OCBC
Another display of robustness
Within expectations. Mapletree Logistics Trust (MLT) produced a good set of 3Q11 results, which was within our expectations. Revenue grew by 25.4% YoY to S$68.3m, driven by contributions from accretive acquisitions, positive rental reversions of 22% and improvement in occupancy rate to 99% (98% in 3Q10). While NPI increased at a slightly slower pace of 23.7% due to higher number of multi-tenanted buildings and repair works, amount distributable to unitholders was up 29.7% on lower other expenses and partial distribution from divestment gains of 9 and 39 Tampines. This translates to a DPU of 1.69 S cents (+9.7% YoY due to enlarged unit base), or an annualized yield of 7.8%. For 9M11, revenue and DPU tallied S$196.4m and 4.84 S cents respectively. These formed 75.6% and 77.8% of our full-year estimates (74.7% and 71.2% of consensus), respectively.
Strong capital management. As at 30 Sep, the group’s aggregate leverage was at 41.3% (relatively unchanged from 40.6% in 2Q), still healthy in our view. Subsequent to 3Q, management also updated that it had successfully refinanced JPY17b (S$281m) of debt maturing in 2012 by extending its maturity to 2018. This substantially improved its average debt duration from 2.7 to 3.7 years and brought down its proportion of debt maturing 2012 from 31% to 14%. Hence, we do not foresee any major refinancing risk in the coming year.
Diversified portfolio to provide stability. Going forward, MLT cautioned that the Asian economies are not likely to escape unscathed with a deepening euro zone debt crisis and stagnating US economy. As such, it will remain watchful of the evolving environment and maintain a disciplined approach towards investment activities. However, management added that it is still seeing active customer enquiries and high rate of renewal/replacement of expiring leases thus far (88% of NLA due for renewal has been renewed YTD). Moreover, it expects its diversified portfolio and healthy weighted average lease to expiry of six years to provide relative stability in its operating performance.
Maintain BUY. MLT is also focusing on asset management initiatives to identify growth opportunities and optimize yield. On this front, the group identified 21/23 Benoi Sector as a suitable redevelopment opportunity (which may potentially add 70,000 sqm GFA to its portfolio). While more details will only be announced in due course, we are positive on this development as it clearly shows MLT’s proactive approach to enhance value. We maintain our BUY rating on MLT with revised fair value of S$1.07 (S$1.06 previously), after factoring in the 3Q results.
FSL – DBSV
Progress towards refinancing borrowings
At a Glance
• 3Q11 DPU maintained at 0.95UScts, though distributable cash flow improves on sequential basis
• Progress made towards refinancing existing borrowings
• Yields look attractive but maintain HOLD pending the outcome of refinancing exercise and efforts to deploy 2 product tankers from spot market to long-term leases
Comment on Results
Spot market product tanker performance disappoints but cash flow shores up by new TORM leases. As a result of full-quarter lease revenue from the two newly acquired vessels leased to TORM, revenue was up 22% to US$28.6m. On a q-o-q basis though, revenue was flat as the product tankers on spot market performed weaker. Cash earnings were boosted 16% y-o-y and 11% q-o-q to US$15.6m due to the accretive TORM deal and lower interest expenses following the expiry of covenant waiver period in 2Q11. After loan repayments of US$7.2m, net income available for distribution was up 38% y-o-y to US$8.4m, but management decided to maintain DPU of 0.95UScts for the quarter.
Recommendation
Loan refinancing is the first priority. With one tranche of close to US$240m maturing in April 2012, and another tranche of US$243m maturing in March 2014, management has decided to refinance the entire outstanding amount with a partially amortising 6-year loan. Firm commitments have been secured from a group of 6 lenders (both existing and new) for 90% of the amount and management is hopeful of securing the rest by the end of FY11. We estimate spreads for the new loans will be significantly higher than existing 125-145bps, pushing up interest costs. And with loan amortisation payments to be made every quarter, DPU growth may be limited. Pending finalization of and details of the refinancing exercise and a long-term lease solution to end the earnings volatility from the 2 product tankers trading on the spot market, we retain our HOLD call on the stock. Our TP is revised down to S$0.34 (14% target yield) as we account for the higher risk environment. Upside may be capped by recent round of equity placement at S$0.35.
FCT – DBSV
Expect another high note
At a Glance
• FY11 DPU of 8.32 Sct was slightly above our expectation of 8.2 Sct
• Revenue to trend up supported by multipronged growth engines; gearing healthy at 31%
• Good defensive stock; maintain BUY, TP raised slightly to S$1.76
Comment on Results
FY11 DPU of 8.32cts at a record high. On a y-o-y basis, 4Q11 revenue and NPI rose 5.1% and 13.7% to S$34.1m and S$25.3m respectively on the back of strong portfolio performance and partial completion of the AEI works at Causeway Point. Portfolio occupancy strengthened from 87.6% a quarter ago to 95.1% and the group renewed 34,161sf of retail space at 7.9% higher than the preceding rents. Consequently, distribution income rose 10.8% to S$18.3m, translating to a DPU of 2.35 Scts. There was net revaluation gain of S$97.2m, largely from Causeway Point and North Point at slightly compressed cap rates (lowered by 10 to 25bps), as well as Bedok Point bringing portfolio value to S$1.7bn or book NAV of S$1.40/unit (+8.5% y-o-y).
Revenue drivers all set for next year. Going forward, we expect to see steady income growth from (1) full year contribution from Bedok Point from 1QFY12 – expected to add about S$7m p.a. at NPI level; (2) progressive completion of AEI works at Causeway Point and reopening of the refurbished sections at the basement, level 1 and 2; (3) ability to continue to drive rental reversions with 35% of its portfolio NLA up for renewal in FY12. 98% of the leases have step-up rental clauses and we expect 3-5% rental reversion in FY12; and (4) interest savings from refinancing of the S$80m revolving loan.
Recommendation
Yield for FY12 at 6.1%, Maintain BUY. We continue to like FCT for its pure exposure to the resilient and stable suburban market. Balance sheet remains robust with 31.3% gearing. We nudge up FY12F DPU by 1.6% after including the additional income from Bedok Mall. Maintain BUY with a slightly higher DCF-based TP of S$1.76 as we roll our numbers forward into FY12.