Suntec – DBSV
Multi-pronged strategy at work
• No surprises in results
• Growth from organic and inorganic means
• Maintain Buy, TP $1.69
Maiden contributions from MBFC. Suntec recorded distribution income of S$44.9m, -2.8% qoq and –6% yoy, dragged down by slightly lower contributions from both the retail and office properties. While portfolio occupancy improved to 98-99%, impact of negative office reversions impacted bottomline. It renewed/ contracted new leases of 127ksf of retail NLA in Q4 and another c304ksf of office NLA at an average of S$8.16psf/mth, including forward leasing a number of leases due FY11. MBFC1 contributed a maiden S$2.5m. DPU of 2.316Scts (FY10: 9.859Scts) was 20% lower yoy due to a recent placement exercise to partially fund the acquisition of MBFC1. The group took in a S$116.8m revaluation surplus, which lifted book NAV to S$1.78.
Managing organic growth, looking for new acquisitions. Looking ahead, the group will continue to benefit from the rising office market. It has proactively renewed c276ksf of leases expiring in FY11 and has a remaining 164ksf (6.8%) of office space (excl IDA’s 90ksf), and another 276ksf of retail area to be renewed this year. Negative rental reversions are likely to be felt but rising office rents will mean a narrowing of spread between expiring and re-contracted leases. In addition, it is proactively looking for new acquisitions. Its current gearing stands at a healthy 38.4%. In addition, earnings are likely to be boosted by a lower all-in financing cost of 2.8% (vs 3.77% previously).
Maintain Buy. Suntec offers FY11 and FY12 DPU yield of 5.7% or 310bps spread over the risk free rate. The target price of $1.69 translates to a total return of 13%. We believe potential further upside can be realized as he group executes on its organic growth or acquisition strategies.
ART – OCBC
Investment thesis intact; maintain BUY
4Q10 DPU of 2.16 S-cents. Ascott Residence Trust (ART), one of our 2011 top S-REITs picks, announced a promising set of 4Q10 results on Fri. Its 4Q10 gross revenue of S$72.83m was up 58.1% YoY and 56.7% QoQ. Gross Profit of S$39.3m rose 80% YoY and 86.25% QoQ. The increase in revenue and gross profit were mainly due to the contribution of S$30.3 million and S$19.2 million respectively from the 28 properties acquired by ART on 1 Oct 2010, which offset the decrease in revenue of S$4.6m from the divestment of Ascott Beijing and Country Woods Jakarta. Distributable income rose 108% YoY and 100.3% QoQ to S$23.9m. 4Q10 DPU was up 15.6% YoY and 16.8% QoQ at 2.16 S-cents.
Portfolio Performance. Most of the European acquisitions are on master leases which offer less cash-flows volatility to the trust. Eight out of ART’s 64 properties are also on management contracts with minimum guaranteed income and an average weighted remaining tenure of more than seven years. For 4Q10, 25% of the gross profit was derived from master leases, while 16% was from contracts with guaranteed income. The ensuing income stability (41% of gross profit) helps to improve management’s debt capacity, which stands at 40.3% gearing as of 31 Dec. 4Q10 revenue (excluding insurance claims) increased, as compared to 4Q09, for most markets, except for China, Japan and Philippines. Revenue dropped for China, on the back of lower performance in Tianjin, which was affected by increasing competition. Japan’s revenue declined following the weaker performance from the rental housing properties. In Philippines, the decrease was due to weaker market demand. Elsewhere, revenue bumped up as a result of higher demand for serviced apartments following
stronger economic growth and the increase in RevPAU.
Still compelling. In line with our OVERWEIGHT rating for the Serviced Apartment subsector1 , we think ART will continue to ride on the hospitality recovery cycle, boosted by improving employment, FDI and GDP figures. Going forward, ART will continue to seek yield-accretive acquisitions in Singapore, China, Vietnam and the UK. It will also explore opportunities in new emerging markets. For FY2011, it also expects the Singapore properties to continue to benefit from the increasing demand for serviced apartments as a result of the robust economy and the UK properties to do well in the lead up to the 2012 London Olympics. Our investment thesis on ART is intact, and we believe the manager will continue to work hard to extract value from ART’s expanded portfolio for unitholders. Maintain BUY with a revised fair value of S$1.34 (Total returns of 12.6%)
PLife – DBSV
A strong finish for 2010
At a Glance
• 4Q10 DPU of 2.38 Scents (+16% yoy) within expectations
• Effective borrowing costs lowered further to 1.94% (from 2.13% in 2Q10) with recent re-pricing of a JPY5.3bn loan
• Buy, S$1.90 TP assumes S$200m acquisitions in 2011
Comment on Results
4Q10 DPU 2.38 Scts within expectations. 4Q10 DPU of 2.38 Scts (+16% yoy; 6% qoq) was within our expectations. Gross revenue grew 21% yoy to S$21.5 m, driven largely by additional contributions from a total of 19 nursing homes acquired (Nov’09-Jul’10) and higher revenue from Singapore properties. NPI margin moderated slightly to 91.5% arising from expenses related to the 19 new nursing homes. PREIT recognized a fair value gain of S$18.7m (FY09: S$28.9m) on its investment properties, equating to a 1.45% gain on total portfolio value.
Interest savings from lower effective borrowing costs of 1.94%. As part of actively managing its debt, PREIT successfully re-priced an existing JPY5.3bn (S$84m) loan with effect from 1 Jan’11. This lowers its all-in cost of debt further to 1.94%, from 2.13% previously. The interest cost savings amounts to c.S$800k/yr. Debt weighted term to maturity is 3.95 years, with only S$50m (10.7%) debt due in 2013. Gearing at 34.6% provides headroom of S$122m and S$256m before reaching 40% and 45% gearing.
Acquired another Jap nursing home for S$8.9m at 8% yield. PREIT acquired another Japanese nursing home for S$8.9m, or at a NPI yield of 8% from Sawayaka Club, the same operator as the 6 homes acquired in Jun’10. Going forward, we believe management will still continue to deliver on inorganic growth, though this could also come from other countries, such as Malaysia and Australia, in our view.
Recommendation
Maintain Buy, TP: S$1.90. We like PREIT for its stable and defensive portfolio; 88% of portfolio revenue with downside rental protection. We believe the REIT will continue to provide organic growth, while exploring portfolio expansion opportunities going forward. We have assumed S$200m worth of acquisitions in 2011, funded 70%/30% by equity/debt to maintain its existing gearing ratio of c.35% while still empowering PREIT to undertake further opportunistic acquisitions.
MLT – DBSV
Portfolio to grow
• Ends 2010 on a strong note with 4Q10 DPU of 1.55 Scts
• Acquisition growth remains the main driver in 2011, raising acquisition assumptions to S$300m
• BUY, revised TP to S$1.07 offering total return of 16%.
Strong DPU of 1.55 Scts expected. Topline and net property income were higher at S$61.0m (+20% yoy, +12% qoq) and S$53.8m (+22%yoy, +13% qoq), mainly due to new asset contributions towards 2H10, while underlying portfolio remained resilient. Distributable income came in at S$36.8m (+28%yoy), aided by interest savings from lower interest environment (average cost of debt fell to 2.2% vs 2.8% a year ago). The trust also recorded a slight revaluation gain of S$18.9m and NAV remained stable at S$0.85 per share.
Healthy occupancy of 98%; leasing demand remains strong. Portfolio occupancy remains at a high of 98%, with Malaysia seeing sequentially higher occupancy, which increased by 5%. Looking ahead into 2011, 16.6% of its revenues will be up for renewal (the majority are derived from its Singapore and HK operations). We believe the manager should deliver positive rental reversions into 2011 (forecasting average 3% for portfolio in 2011).
Expect target acquisitions to be yield accretive. Backed by sponsor’s visible development pipeline while considering 3rd party opportunities, we believe MLT remains in a sweet spot to deliver higher value – trading at implied FY11 yield of 6.5% means that target acquisitions; if executed, should be accretive. We have now assumed S$300m (doubled from previous S$150m) worth of acquisitions in 2011, to be funded on a 35-65% debt-equity ratio.
BUY, DCF-based TP raised to S$1.07. Trading at 1.2x P/BV, we believe the market is pricing in acquisition growth, which we are comfortable, given its execution track record. MLT offers a growing FY11-12 yield of 6.6-6.8%.
FSL – DBSV
Cash generation continues to disappoint
At a Glance
• 4Q10 DPU maintained at 0.95Uscts as expected, despite further decline in net cash generated from operations.
• Contribution from spot charter of product tankers remains tepid; organic DPU growth unlikely in FY11.
• Placement proceeds of ~US$28m raised in FY09 not utilized yet, visibility on acquisitions remains low.
• Maintain HOLD with TP of S$0.45
Comment on Results
4Q10 revenue of US$24.1m was up 3% q-o-q but operating profit was down 19% q-o-q, owing to lower bareboat equivalent rentals received from the product tankers as well as drydocking costs for one of them. As a result, net operating cash was down 8% q-o-q and 20% y-o-y to US$13.0m. While payout was maintained at 0.95 UScts for the quarter, the Trust had to draw down US$0.7m working capital to distribute the US$5.7m to unitholders, after the usual quarterly loan repayment of US$8m.
Outlook and Recommendation
The product tankers continue to be deployed in the spot voyage markets, but utilization rates and net bareboat equivalent income remain below expectations. While freight income was higher q-o-q in 4Q10, expenses were higher as well and the 2 tankers generated bareboat charter equivalent revenue of only US$0.2m in 4Q10, compared to the US$3.8m revenue per quarter applicable during the original charter. With tanker rates unlikely to perform in the near term, we choose to remain conservative on our earnings assumptions from these vessels in FY11.
While the Trust did not provide an update on fleet valuation of US$700m as at end-3Q10, a big change is unlikely. This puts the current value-to-loan ratio at 154%, and implies about 160% coverage at the end of waiver period in June 2011, above the requirement of 145%. We expect DPU payouts to remain at current level in the near term and given that we have not yet seen any acquisition funded by the US$28m placement proceeds raised in FY09, we maintain our HOLD call at an unchanged TP of S$0.45.