StarHill Global – OCBC
Positive on Wisma’s facelift but Japan Earthquake created a dent
Facelift for Wisma Atria. Starhill Global REIT announced its plan to embark on asset redevelopment of Wisma Atria to boost the mall’s positioning along Singapore’s Orchard Road. The first phase of the redevelopment will commence in 1Q11 and is expected to complete by 3Q12. The asset redevelopment will unveil an ultra sleek frontage for Wisma Atria, highlighted by double-storey storefronts designed to showcase the latest flagship stores of international retailers. There will be full width steps spanning the facade of Wisma Atria, which will improve accessibility and also provide a permanent flood control measure, doing away with mechanical flood barriers. In addition, there are strategically located ramps and walkways leading to the new shop fronts from the surrounding malls and the nearby Orchard Road MRT station. Phase one of Wisma Atria’s asset redevelopment is expected to incur capex of about S$31m and generate an additional net property income of approximately S$2.5m per annum when stabilized, representing a ROI of approximately 8.0%. The cost of the asset redevelopment works will be funded from the proceeds of the rights issue completed in 2009 and/or working capital. We view this positively, in terms of both higher occupancy and rental rates following the enhancements in 2012.
Impact of Japan earthquake. Starhill has seven malls located in central Tokyo, which contributed 4.6% of total gross revenue and 6.6% of portfolio value as at 31 Dec 2010. So far, Starhill has announced that there is no known damage to the malls based on preliminary reports by its property managers. Nonetheless, we expect retail sales in Japan to be impacted, on the back of electricity rationing in Tokyo which will affect business operations in the near term, as well as an anticipated dent in tourist shoppers in the medium term following Japan’s nuclear fiasco and the risk of radioactivity exposure. We thus revise our FY11/FY12 gross revenue estimates for Japan properties down by 5% to adjust for declining sales and rental income. Our sensitivity analysis also shows that a 5% drop in the rental income of Starhill’s Japan assets will decrease its fair value by 0.4 S-cents.
Valuation still compelling. We noted that Starhill’s assets in Singapore, Malaysia, Australia and China still constituted the majority portion (93.4%) of its portfolio. Starhill is currently trading at a PBR of 0.66x, which is lower than its historical PBR of 0.73x since listing. Notwithstanding that the Japan crisis has bitten into Starhill’s earnings, we still believe in its prime assets positioning, strong sponsor and sound financials. Maintain BUY with a decreased fair value of S$0.69 (Price upside 12.2%)
FCT – CIMB
Riding on retail growth
• Maintain Outperform. We expect strong job and wage growth to support retailsales (ex-auto) growth of about 7% for Singapore this year (7.2% in 2010) and growth in real private consumption of 3-3.5% (4.2% in 2010, 0.2% in 2009). With FCT’s portfolio of well-located retail malls, we expect the strength to drive up occupancy rates and rental reversions at FCT’s retail malls. Ongoing enhancement at Causeway Point and any upside from higher turnover rents should also support organic growth while an impending injection of Bedok Mall from its sponsor could provide acquisition catalysts. Maintain Outperform and DDM-based target price of S$1.86 (discount rate 7.9%). We see catalysts from announcements of accretive acquisitions.
• Positive rental reversions expected. Notwithstanding lower Causeway Point income during its refurbishment, contributions from acquisitions and higher rental reversions lifted FCT’s 1Q11 NPI by 17% yoy. With positive rental reversions expected from stronger retail sentiment and ongoing asset enhancement at Causeway Point, its largest asset, we are expecting a stronger 2H11.
• Acquisition catalyst from Bedok Mall injection. Bedok Point received TOP in Nov 10. With the asset 98% leased as at end-1Q11, we see acquisition catalysts from an expected injection into FCT (targeted for CY11). Any accretion should also provide upside to our estimates.
Retail REITs – CIMB
Towards greater heights
• Yoy, January retail sales ex-auto rose to their highest in 11 months. While seasonality may have distorted the data as Chinese New Year celebrations fell earlier this year than in 2010, January’s 15.6% growth was nonetheless the 15th consecutive month of positive yoy growth. The increase was also broad-based with department-store sales up 21.5% yoy, sales of apparel & footwear up 16.7% yoy and sales of watches & jewellery up 14% yoy. These segments were the leading contributors.
• New weightings and new base year for index. Every five years, government statisticians would re-weight components in Singapore’s retail sales index to “reflect changes in the structure of retail trade and food and beverage services industries.” The new base year is now 2010 instead of 2005 and the most significant change is a cut in the weighting for auto sales, from 34.5% to 24.7%. Auto sales in Singapore are affected more by the government’s private-transport policy than consumer sentiment. On the other hand, the weights for other key segments have been raised: department-store sales (+2.03% pts), apparel and footwear (+1.72%), watches and jewellery (1.63%) and tech goods (1.9%). Despite auto’s lower weighting, headline retail sales are still distorted by auto sales and this is the reason for our preference for retails sales excluding auto as a better proxy for underlying consumer sentiment.
• Discretionary spending to remain robust despite external shocks. Strong job and wage growth is likely to support further retail-sales (ex-auto) growth of about 7% this year (7.2% in 2010) and growth in real private consumption of 3-3.5% (4.2% in 2010, 0.2% in 2009). We do not expect the Japanese disasters or the unfolding events in North Africa/Middle East to have a long-lasting impact on private consumption unless global business confidence is dented in a major way in the coming weeks or months. While international airlines have been reporting light passenger loads going into Japan, outbound flights are full. And while the Japanese disasters might reduce Japanese arrivals in the near term, we maintain our overall tourist-arrival growth forecast of 8-10% for this year, to 12.8m (11.6m in 2010, government forecast of 12m-13m).
• Stock implications: FCT and CMT well-placed. With stronger retail sales expected to benefit retail tenants and drive up occupancy rates and rental reversions, we expect retail REITs like FCT and CMT to be beneficiaries. Between the two, we prefer FCT for its organic growth from asset enhancement at Causeway Point, acquisition growth potential and more resilient rental profile.
KREIT – DBSV
Buys more of Prudential Tower
• Raises stake in Prudential Tower to 92.8%
• Strengthens strategic hold but muted near term earnings impact
• Maintain Hold, TP raised to $1.32
Buys a further 48,158sf of Prudential Tower. K-reit is acquiring 4 floors of office space (L26-29) at Prudential Tower, totaling 48,158sf, from 4 separate sellers. The consideration of S$125.1m, which includes S$8.1m income support, works out to be S$2,430psf (without support). The price, when compared to the S$2,300psf paid for the nearby Capital Square, is fair. Strategically, this deal makes sense as it will increase the group’s ownership of the property to 92.8% from 73.4% previously and make it easier for any potential future asset enhancements.
Marginal near term to earnings. The income support is valid for 4 years (till Mar 2015) after completion of the transaction. Based on the proforma income contribution of S$1.3m for FY10, the estimated NPI yield works out to be sub 5%. Given that the purchase will be funded by bank borrowings, the bottomline accretion is a modest 1-2%. See-through gearing will increase to 39% post-acquisition.
Maintain Hold. The deal will benefit K-reit in the long run when the office cycle continues to tick up. We have tweaked our earnings up marginally by 0.4% and 1.5% in FY11F and FY12F respectively, to factor in the additional contributions from the purchase.
Correspondingly, we have raised our DCF-backed TP to S$1.32. K-reit’s share price had pulled back in tandem with the market in the past week and currently offers an 8.1% total return.
MCT – BT
Mapletree postpones commercial Reit IPO
It had expected to raise $1b but jittery market stays its hand
Mapletree Investments has postponed its planned commercial property trust, which was expected to raise about $1 billion, BT understands.
The property group had planned to lodge the prospectus for its Mapletree Commercial Trust (MCT) this week. But the initial public offering, or IPO, has now been delayed due to volatile markets caused by the earthquake and tsunami in Japan 10 days ago, the sources said.
The group said yesterday that it is not at a stage of making any announcement about its planned commercial property trust. ‘Mapletree Investments has previously disclosed plans for a commercial Reit. At this point we are not at a stage where an announcement is required on our part. We will make the necessary announcements in due course,’ said a Mapletree spokesperson.
BT understands that there are doubts about the filing after the Japanese earthquake. The much anticipated Hutchison Port Holdings (HPH) Trust, the world’s largest IPO so far this year, went underwater last Friday on its market debut in Singapore. Market watchers had predicted a lacklustre first-day showing from the US$5.45 billion listing as investors remained jittery about Japan’s nuclear crisis.
MCT is expected to hold the VivoCity mall in its portfolio. Other assets could include Merrill Lynch HarbourFront, PSA Building and Mapletree Business City, an integrated business hub on Alexandra Road. The real estate investment trust (Reit) is aiming to raise about $1 billion, reports have said.
MCT is the fourth Reit by Mapletree Investments, which is fully owned by state investment company Temasek Holdings.
The property group listed Mapletree Logistics Trust in 2005 and jointly launched Lippo-Mapletree Indonesia Retail Trust with Lippo Group in 2007. Its third Reit, Mapletree Industrial Trust, raised close to $1 billion when it was listed in October 2010.
One analyst said that MCT will still hold appeal for investors – once the market settles – as it is a ‘brand-name’ IPO.