CRCT – UBS
Steady yield and attractive theme priced in
Exposure to China theme remains attractive
We continue to like CRCT for its exposure to the China consumption and urbanization theme. However at 6.5% 2010 DPU yield, it is trading near our DCF derived price target. Our estimates are unchanged. We downgrade our rating from Buy to Neutral.
Acquisition only like towards end 2010/2011 and hinges on cost of capital
As the majority of CMA's pipeline of malls is still in the stabilization phase, we think acquisitions are only likely to happen towards end 2010/2011. Cost of capital is likely to be a key determinant as the gearing is 34% and capped at 35% given no credit rating. Assuming 35%/65% debt/equity funding, we estimate accretion from new deal flow would make sense when CRCT is at S$1.70. In the past, CRCT's share price had outperformed strongly when the market was willing to price in the option of acquisition.
Credit rating could lift debt headroom
The key risk, in our view, is that CRCT obtains a credit rating which would lift the debt headroom for acquisitions. Speaking with management, it does not appear that this is likely to occur in the near term. The implementation of a formal REIT legislation in China could potentially facilitate this process but the actual timing is hard to determine.
Valuation: Downgrade to Neutral
Our price target uses 2.6% risk-free, 1.1x beta, 5% ERP and 2.5% terminal growth.
CMT – Daiwa
Time to show off leasing prowess
Dominant, but DPU-growth challenged
• We maintain our 3 (Hold) rating for CapitaMall, which looks fully-valued (in our opinion) for a dominant market leader that faces low single-digit-percentage DPU growth (based on our revised DPU estimates) for FY10 and FY11, and already trades at a premium to its December 2009 NAV of S$1.56.
Clarke Quay acquisition could provide some boost
• We estimate that the acquisition of Clarke Quay (announced on 9 February) from its sponsor, CapitaMalls Asia (CMA SP, S$2.29, 5), would be marginally DPU accretive by about 2%, and any contribution to DPU growth for FY10-11 would help to overcome the sluggish performance of the existing portfolio, where we expect modest rental reversions and subdued contributions from asset-enhancement activities. We expect a big pick-up in DPU growth only in FY12, when the Jurong Entertainment Centre redevelopment comes on stream.
As good a time as any to show off its leasing skills
• One big difference between retail and office leasing is the ability to re-invent space for a brand new or totally different retail concept, and if successful, set higher market-rent benchmarks. We have assumed average overall rental increases (relative to preceding rents) for its lease renewals of 2.5% for FY10 and 3.1% for FY11, but we think it would be an opportune time for the manger to show off what we see as its industry-leading leasing capabilities and surpass our relatively low expectations for rental reversions. Since listing, CapitaMall has achieved average rental increases (over preceding rents) of 7.3-12.6% for FY03-08.
FCT – Diawa
Mission accomplished
Rating downgraded to 3 (Hold) from 2 (Outperform)
• We have downgraded our rating for FCT to 3 (Hold) from 2 (Outperform). Trading at a DPU yield of 6.1% on our revised FY10 forecasts, in line with the sector average, and a 12% premium to NAV (as at the end of December 2009), we believe any further unit-price appreciation will be limited for its Singapore suburban retail-mall portfolio at a time when risk premiums for defensiveness could be diminishing.
• For FY11, FCT could possibly acquire the sponsor's 81,000 sq ft Bedok Mall, a suburban mall in the vicinity of the Bedok MRT station, and similar in scale to its two most recent acquisitions, Northpoint 2 and YewTee Point. Due to the uncertainties over valuations, capital-market conditions, and the exact timing of the deal, we have not factored in any contribution from Bedok Mall.
• We have also not made any forecast assumptions for NPI improvements from its next major AEI for Causeway Point, FCT's largest property asset. Considering that Causeway Point's passing rents were just over S$10 psf for FY09, compared with over S$13 psf for Northpoint (after its recent asset enhancement), the NPI accretion from the AEI could be significant.
S$1.44 target, assuming a 5.25% effective cap rate
• We set our FCT target price of S$1.44 at parity to our RNG valuation (a finite-life Gordon Growth model). We have applied an effective cap-rate assumption of 5.25%, compared with the weighted-average cap rate of 5.76% for its portfolio, based on the most recent (September and November 2009) valuations.
StarHill Gbl – Daiwa
Addition by subtraction
2 rating maintained – still trades at unjustified discount, in our view
• We maintain our 2 (Outperform) rating for Starhill Global because investor concerns about the sponsor and the pending acquisition of retail assets in Malaysia have created one of the rare value opportunities in the S-REIT market for this year, in our opinion. Starhill Global trades at an unjustified (in our opinion) 32% discount to its December 2009 NAV of S$0.82.
Attractive to us even without the proposed acquisitions
• As a measure of prudence, we have disgorged the estimated DPU contribution from the proposed acquisition of the sponsor's retail assets in Malaysia, Starhill Gallery and Lot 10, for RM1,030m, after an absence of concrete news on the deal since its announcement on 18 November 2009. Even after revising down our FY10-12 DPU forecasts by 11.7-14.6%, Starhill Global's DPU yield of 7.1-7.6% is well above those of the SREIT sector and its peers in the retail-property segment. If Starhill Global fails to acquire the assets, for whatever reason, we would not necessarily view it as a bad outcome.
A more rigorous target price of S$0.65
• Our six-month target price of S$0.65 is based on parity to our RNG valuation (a finite-life Gordon Growth model), in which we have discounted the expected income stream from its Singapore properties only at an effective cap rate of 5.89%. We have valued the overseas properties at their December 2009 net asset values, and have assumed that any acquisitions in 2010 would add no value to the overall portfolio.
REITs – CIMB
Diversifying funding sources
• Maintain Neutral. SREITs recently raised more than S$900m from capital markets at lower interest rates and longer tenures than a year ago. The opening up of capital markets should be very positive for the REIT sector, particularly as debts maturing in 2011-12 remain chunky. Nonetheless, we continue to perceive risks in the medium term if investors' appetite for bonds and notes does not grow more significantly, or if demand for higher yields intensifies in 2H10. We have not adjusted our interest-rate assumptions for REITs that have announced their refinancing as the quantum of issuance remains rather small and/or is significantly hedged. We maintain our financial estimates, target prices and Neutral position on the sector. Large-cap REITs (AREIT, CMT, CCT) are still relatively expensive and lack near-term catalysts. CDL-HT remains our sector top pick for its low gearing and on the back of our positive outlook for the hospitality industry
• Lower interest rates and longer tenures. Cost of debt has declined 100-150bp from a year ago for 3-year debt. Additionally, almost 90% of the issuances had tenures of 5-7 years, much longer than the standard three years which were available to the sector in the same period.
• Relief for chunky debt maturing this year and funding for acquisitions. The opening up of capital markets should be very positive for the REIT sector in providing a alternative funding source for refinancing and acquisitions. If capital markets remain open, debt maturity profiles for the whole sector could be termed out gradually. REITs seeking to acquire more assets would also have an alternative funding source.
• Medium term refinancing risk still exists. Nonetheless, we continue to perceive risks in the medium term if investors' appetite for bonds and notes does not grow more significantly, or if demand for higher yields intensifies in 2H10.