Cambridge – DBS
Addressing its gearing
At a Glance
• Results slightly above
• Asset restructuring/ dividend re-investment scheme proposed
• Maintain HOLD, TP S$0.49.
Comment on Results
Results slightly above. Cambridge REIT (CIT) results were slightly above estimates. Gross revenues and net property income (NPI) grew by 2.2% to S$18.7m and 1% to S$16.4m respectively on the back of steady occupancies (99.7% in 3Q09). However, distributable income declined 5.5% to S$11.2m largely due to higher interest costs, translating to a DPU of 1.34 Scts.
Moving occupancy assumptions upwards. The out- performance was mainly due to higher than projected occupancy levels, as we expected a slight dip. With improving economic outlook and that less than 3% of leases are up for renewal over the next 3 years, we have moved our occupancy assumptions upwards to be in line with current operational performance, leading to a 8% increase in our forward DPU estimates.
Moving towards gearing of 30-35%. The manager is reviewing ways of reducing the trust’s gearing from 42% to 30-35% level. Various measures are proposed which include (i) divesting certain non-core assets (ranging from S$25m-50m) and proceeds will be channeled towards repaying debt, (ii) a dividend re-investment scheme to conserve cash (possible instituting in 4Q09). The above are currently not included in our current forecasts.
Recommendation
Prospective yields of 11.2%. While we acknowledge that FY09-11F yields of c11% remains attractive, uncertainties from outcome from its portfolio restructuring could likely cap re-rating opportunities in the near term. Maintain HOLD, TP adjusted to S$0.49.
CMT, CRCT – BT
Trump card for CapitaLand in CMA
CAPITALAND’S third-quarter report card released this week was a marked improvement from its showing in the first two quarters of this year. Still, the $167.2 million net profit that it achieved for the first nine months of this year is a far cry from the $1.18 billion in the same period last year.
However, plans to float a stake in its integrated shopping centre business under CapitaMalls Asia (CMA) by the year-end could add handsomely to CapitaLand’s fourth-quarter and full-year bottom lines.
CMA has a net asset value of $5.3 billion but assuming that its assets are valued at 1.5 to two times book value during the initial public offering (IPO), the total market worth of CMA would be about $8-10 billion. If CapitaLand floats a stake of 30 per cent, the pre-tax profit that it stands to book from the IPO could be in the order of $800 million to $1.4 billion.
CapitaLand’s management has indicated that the board may consider recommending a special dividend to shareholders following CMA’s flotation.
UBS Investment Research, in a recent paper, estimates that assuming an $8 billion valuation for CMA and a 30 per cent free float, the special dividend would work out to 27 cents per CapitaLand share if it decides to pay out 50 per cent of the IPO proceeds, and 54 cents per share assuming a 100 per cent payout.
On a $10 billion valuation for CMA and a 40 per cent free float, the payout could range from 45-90 cents per share.
Since CapitaLand announced its plans earlier this month to float CMA, its share price rallied about 21.5 per cent to a high of $4.46 on Monday, although it has given up much of the gain, ending at $4.15 yesterday.
By UBS’s calculations, an $8-10 billion valuation for CMA will add 61 cents to $1.06 to its revalued net asset value (RNAV) per share for CapitaLand, which it estimates at $4.30 based on CMA’s $5.3 billion book value. By launching an IPO, a higher value will be placed on the CMA business than if it remained as an unlisted part of CapitaLand. Or as CapitaLand’s management has put it, its plans to float CMA will ‘unlock shareholder value by crystallising the value of CapitaLand Group’s integrated shopping mall business’.
CapitaLand shareholders stand to gain by approving the group’s plans to float CMA. No doubt it will also be good for members of its management, whose pay packets should benefit from a stronger bottom line. And not to forget JP Morgan, the sole financial adviser.
However, some CapitaLand shareholders may also hold stakes in CapitaMall Trust (CMT) and CapitaRetail China Trust (CRCT), which many analysts reckon may fare less favourably after CMA is listed.
CMT may face short-term price weakness from asset reallocation to CMA, as UBS says. The process has already begun. CMT’s unit price has slipped from $1.82 before the announcement on CMA to yesterday’s closing price of $1.60.
CMA, with a portfolio of 86 malls in China, Singapore, Malaysia, Japan and India, may be more appealing to investors than CMT – which has a presence only in Singapore. CMA’s free float market cap could rival CMT’s. Still, CMA could find it worthwhile to sell assets, such as its 50 per cent stake in ION Orchard, to CMT given the tax transparency that CMT, as a real estate investment trust (Reit), enjoys in Singapore. In other words, if ION remains in CMA, the income from the mall will be taxed at the corporate tax rate (at the vehicle or CMA level). If however, ION is sold to CMT, the mall’s income will be exempt from payment of corporate tax at the Reit/vehicle level, under the tax flow-through allowed for Singapore Reits.
So CMA will retain an incentive (from the viewpoint of this tax saving at least) to develop, warehouse and sell assets to CMT – pretty much the arrangement that now exists between CapitaLand and CMT.
However, this may not be the case for CRCT. That’s because CRCT does not enjoy tax transparency since its income is derived from the ownership of malls in China, where it has to pay taxes on the income before it can bring it to Singapore.
This being the case, there could be less incentive for CMA to offload its China malls in future to CRCT. In fact, it may diminish or extinguish the raison d’etre of CRCT.
When CapitaLand floated CRCT in December 2006, it had planned to grow its initial $690 million portfolio of seven malls in China to $3 billion by end-2009. So far, it hasn’t been very successful. Today, its portfolio comprises eight malls worth $1.2 billion.
Who knows, CapitaLand could eventually privatise CRCT and let its China malls business sit entirely in CMA. This could provide a nice exit for CRCT shareholders.
These are some questions that CapitaLand shareholders who also own units in CMT and CRCT may ponder as they vote tomorrow on CapitaLand’s plans to float CMA.
ART – BT
Ascott Reit distribution slips 25%
ASCOTT Residence Trust (Ascott Reit) said that third- quarter unit-holders’ distribution fell 25 per cent to $11.8 million from $15.9 million a year ago as it saw weaker demand for its serviced residences in Singapore and China.
Distribution per unit (DPU) was 1.92 cents for the quarter ended Sept 30, 2009, down 26 per cent from 2.61 cents in Q3 2008.
‘The lower performance as compared to Q3 2008 was a result of the global economic slowdown, increased competition from new supply in Beijing and Shanghai, and the strong performance in August 2008 due to the Beijing Olympics,’ said the real estate investment trust (Reit) in a statement. Revenue per available unit, or RevPAU, fell 24 per cent year-on-year to $124 in Q3 2009. The reduction in RevPAU was due to reduction in both average daily rates as well as occupancies at the group’s serviced residences. Revenue for Q3 2009 fell 17 per cent to $44.4 million.
The trust’s management said, however, that the challenges posed by the global economic downturn to the hospitality industry eased somewhat in Q3 2009 compared to Q2.
‘Our Q3 operating performance has shown further signs of stabilisation in hospitality demand,’ said Lim Jit Poh, the trust’s chairman. ‘While we remain cautious over the pace and extent of recovery, we are confident of the longer-term growth in the markets in which we operate.’ On a sequential basis, unit-holders’ distribution and DPU were 7 per cent higher than Q2’s $11 million and 1.79 cents respectively.
Ascott Reit’s portfolio operating performance also improved in Q3 over Q2, led by RevPAU growth in Japan, Singapore and China of 24 per cent, 15 per cent and 7 per cent respectively.
To ride on the expected upturn in demand as the economy recovers, Ascott Reit has accelerated its asset enhancement initiatives for selected properties. It will also continue to seek yield-accretive acquisitions, it said. The company’s shares fell 2 cents, or 1.8 per cent, to $1.07 yesterday.
Suntec – Daiwa
Net-property income weakens
What has changed?
• Suntec announced its 3Q09 results on 27 October. Net-property income (NPI) of S$47m was 2% below our forecast, but distribution per unit (DPU) of 2.75¢ was 22.5% above our forecast.
Impact
• NPI of S$47m declined by 3.6% QoQ. Gross revenue dipped by 4% QoQ with the major weakness coming from its core Suntec City property. Passing (monthly) rents at Suntec City Mall slipped to S$10.96/sq ft for 3Q09 from S$10.98/sq ft for 2Q09. Meanwhile, the manager signed leases at Suntec City
Office Towers for the quarter at an average of S$7.30/sq ft compared with S$8.42/sq ft for 2Q09 and S$9.96/sq ft for 1Q09.
• Much lower-than-expected net-financing cost was the major positive variance. Suntec’s average all-in financing cost as at 30 September 2009 was 2.88%, almost no adverse impact from the financial crisis.
• We have revised up our DPU forecasts by 9.3% for FY09, 1.3% for FY10 and 0.3% for FY11 after lowering our net financing cost assumptions and our NPI forecasts.
Valuation
• On our revised DPU forecasts, Suntec trades at a 12-month forward yield of 7.6%, one of the most attractive in the sector. We have not changed our six-month target price of S$1.16, based on our RNG valuation (a finite-life Gordon Growth Model), which assumes an effective portfolio cap rate of 6.1% (about 100 basis points above the prevailing cap rate).
Catalysts and action
• We maintain our 3 (Hold) rating for Suntec, in view of the discernible decline in NPI and passing rents and a lingering risk of equity fundraising. We expect Suntec’s fully-diluted NAV to decline from S$1.97 as at 30 September 2009 to S$1.45 by end of 2010 (gearing of 41.2%) and S$1.19 by end of 2011 (gearing of 45.6%).
Cambridge – Daiwa
Quarterly improvement in gross revenue and net-property income
What has changed?
• Cambridge announced its 3Q09 results on 27 October. Net-property income (NPI) was 1.3% above our forecast, while distribution per unit (DPU) of 1.34¢ was 9% above our forecast.
Impact
• Gross revenue increased by 1.3% QoQ and was 1.6% above our forecast. Overall occupancy improved to 99.7% (from 99.5% in the previous quarter). According to the manager, all leases expiring in 3Q09 were renewed. Rental renewal risk remains one of the lowest in the sector, with only 6.6% of leases (by gross revenue) up for renewal in 2009-12.
• The major positive variances came from lower-than-expected other trust expenses and higher-than-expected (pre-distribution) adjustments.
• We have revised up our DPU forecasts by 1.7% for FY09, 3.1% for FY10, and 2.6% for FY11 after raising our portfolio-occupancy assumption to 97.5% from 96%.
Valuation
• We have raised our six-month target price to S$0.54 (from S$0.53), based on our RNG valuation (a finite-life Gordon Growth Model), which assumes an effective portfolio cap rate of 7.5%. Cambridge trades at a 12-month forward yield of 11.1% based on our revised DPU forecasts. NAV was S$0.60 as at 30 September 2009.
Catalysts and action
• We maintain our 2 (Outperform) rating for Cambridge, as we believe its recent operating performance highlights the stability of its distributions. We believe Cambridge faces a moderate risk of equity fundraising, since the manager has guided for a long-term target gearing ratio of 30-35% compared with the latest gearing of 42.6%. However, the DPU dilution could be moderated from a successful sale of some assets above book value.