CDL H-Trust – DMG
‘V’ recovery engenders yield compression
Best proxy to a multi-year tourism resurgence. We raise our TP to S$2.15 from S$1.80 on the back of lower cost-of-equity assumption. CDLHT will be reporting 3Q09 results on 30 Oct and we expect annualised DPU of 8.0¢, a 25% decline over FY08. We are sanguine that CDLHT remains the best proxy to a multi-year tourism resurgence that will take place in 2010. CDLHT is our top pick among the large cap S-REIT counters. Price target is based on a 8.5% (9.3% previously) cost-of-equity assumption. Maintain BUY.
Supernormal visitor growth of 30% – a real possibility! The success stories of countries with similar service offerings reinforce our view that Singapore’s visitor growth will easily punch through the 15-20% level in the initial year of opening (possibly even 30%), with sustained 5-10% growth thereafter. Visitors are expected to extend their stay, leading to a 20-35% spike in visitor days in 2010. Our feedback from hotel operators indicates that pricing power will return when occupancies hover above 80%. We expect systemic occupancies to rise to 84% next year, with ARRs rising to S$250. We believe room demand will immensely overshadow the 16% new supply in 2010.
Stock has outperformed, but still at mid-cycle valuations. We believe 2Q09 reflects the bottom of the earnings cycle for hotel operators, and a ‘V’ recovery will likely transpire beyond 2010, powered by the resurgence in tourism offerings. Despite surging from its S$0.43 March lows, we do not think stock price is fully reflective of the sated impact of the IRs. In the heydays of 2007-08, CDLHT traded at ~5% yield, below the current 7.2% level. We estimate FY10 DPU to spike 35% to 10.8¢, inching above the FY08 levels of 10.6¢.
Euphoric aura could see yields compress to 5%. We believe the stabilising global economy and the twin openings of the IRs will remain as euphoric events in 2010, providing sustained performance for CDLHT’s stock price. We suspect CDLHT could trade towards its heyday yields of 5%, implying a recursive fair value of S$2.15. CDLHT trades at 6.9% FY10 yield, which in our view suggests that the stock has further legs to ride the ‘V’ recovery.
CCT – DMG
Outlook remains challenging
Raising our target price to S$0.87 from S$0.73. Our DDM-backed target price reflects a lower cost-of-equity assumption of 9.1% (10.2% previously). We reduced our risk free rate assumption by 50bps to 2.5%. CMT will be reporting 3Q09 results on 21 Oct and we expect annualised DPU of 6.29¢, a 42.8% decline over FY08. The decline in DPU is attributed to the rights adjustment. Maintain SELL.
Negative rental reversion expected. CCT’s portfolio rents of S$8.14/sqft are above 3Q09 spot rates of S$7.50/sqft. Our channel checks indicate that some landlords in prime areas are currently negotiating rents at between S$6-7/sqft, 20% lower than 3Q09 figures. Despite the economy being technically out of a recession, it is clearly still a tenants’ market and the focus on tenant retention remains paramount for all landlords including CCT. In our view, most office landlords will likely shift their focus on occupancy optimisation at the expense of rental rates, putting further pressure on rents in the coming quarters.
Formidable supply before mid-2011. Over the next 20 months, there will be six major properties due to TOP in the Raffles Place vicinity, out of which, only one (MBFC Tower 1) has been fully pre-leased. The remaining five properties constitute 3.4m sqft of leasable area, many of which will be subjects of premarketing between now, through to mid-2011. In the coming months, landlords of these properties will almost certainly be scrambling to put forward highly competitive rates, a scenario that could further dampen the already fragile rental market. We believe CCT could feel the biggest impact considering that 1) its expiring rents at 6 Battery Road building are S$12.4/sqft for 2010 and S$16.2/sqft for 2011; 2) $7.1/sqft for Capital Tower in 2010; 3) S$10.4/sqft for Raffles City Tower in 2010; and 4) S$12.4 for One George Street in 2011.
Cautious on office sector. At current prices, CCT offers investors a dividend yield of 6.3% for FY10, compared to its historical yield of 5.7% between 2005 and 2007. We view risk-returns on the counter as unfavourable and recommend investors to sell into strength. Our recommendation is also predicated on the subdued earnings visibility within the office space.
CMT – DMG
Fully valued; needs the acquisition push
Raising our target price to S$1.45 from S$1.74. Our DDM-backed target price reflects a lower cost-of-equity assumption of 9.3% (10.2% previously). We reduced our risk free rate assumption by 50bps due to continued low interest rates. CMT will be reporting 3Q09 results on 22 Oct and we expect annualised DPU of 8.39¢, a 41.3% decline over FY08. The decline in DPU is attributed to the rights adjustment. Maintain NEUTRAL. Await entry at S$1.55.
Attention could shift to CapitaMall Asia (CMA). The potential listing of CMA as an alternative Asian retail play could entice major investors. We believe this would be mildly negative on CMT. However, CMT still holds the first right of refusal to CMA’s assets including ION Orchard. We have not factored this into our estimates.
Actively scouting for assets. CMT has articulated its criteria for acquisitions as: 1) initial DPU accretion; 2) scope for asset enhancement; and 3) sustainability of market rents. We understand CMT is particularly keen on third party malls especially those of Pramerica, which could provide a strategic fit with its existing portfolio. Pramerica owns 4 suburban malls in Singapore.
Strong connectivity to boost retail footfalls despite rising competition. Singapore will see an unprecedented increase in retail space of 5.3m sqft by 2011. Out of which, downtown accounts for half of this new supply. Raffles City and Plaza Singapura (~30% of CMT’s rental income) are situated within this zone. We therefore expect higher competition; however this will be mitigated by its excellent connectivity to MRT stations. We are sanguine that the opening of the Circle Line and the two integrated resorts in 2010 will boost shopper traffic.
Maintain NEUTRAL rating. CMT trades at an unattractive 5.2% FY10 yield. While we continue to recognize CMT’s impeccable mall management expertise, valuations for the counter appear rich compared against its historical heyday yield of 5.7%. With a subdued earnings visibility, we view risk-returns on the counter as unfavourable and recommend investors not to accumulate the stock at current levels.
SREITs – DMG
Euphoric aura could further compress yields
Raising target prices on lower cost-of-equity assumptions. We are raising our target prices for S-REITs to account for continued low interest rates. We lowered our 10-year risk free assumptions by 50bps to 2.5%, resulting in the concomitant reduction in cost-of-equity. CDLHT (BUY/TP: S$2.15) is our top pick for large-cap S-REIT and CREIT (BUY/TP: S$0.64) is our top pick smallcap S-REIT. Sector now trades at FY10 yield of 6.8%.
Supernormal visitor growth of 30% – a real possibility! We are sanguine that CDLHT remains the best proxy to a multi-year tourism resurgence that will take place next year. The success stories of countries with similar service offerings reinforce our view that Singapore’s visitor growth will easily punch through the 15-20% level in the initial year of opening (possibly even 30%), with sustained 5-10% growth thereafter. Our feedback from hotel operators indicates that pricing power will return when occupancies hover above 80%. We expect systemic occupancies to rise to 84% next year, with ARRs rising to S$250. Amara Holdings, (UNRATED, RNAV: S$0.68-0.75) is another hotel play that could enjoy colossal spin offs from Singapore’s monumental tourism boom.
Prime office rents likely to fall by a further 20% to S$6/sqft. With 3.9m sqft of new office space (5.4% of existing supply) coming on stream in 2010, the market has become so competitive that it is increasingly common for landlords to offer sweeteners such as fitting-out costs to attract new tenants. Despite the economy being technically out of a recession, it is clearly still a tenants’ market and the focus on tenant retention remains paramount for all landlords including CCT (SELL/TP: S$0.87). Our channel checks indicate that some landlords in prime areas are currently negotiating rents at between S$6-7/sqft, 20% lower
than 3Q09’s figures.
Euphoric aura could see further yield compression. We believe the stabilising global economy and the twin openings of the IRs will remain as euphoric events in 2010, providing sustained performance for the REIT sector. We, however, see minimal upside for CMT and A-REIT (NEUTRAL) as both counters are already trading close to their heyday yields of ~5% and 6%, respectively. We recommend BUY entries for CMT at S$1.55 and A-REIT at S$1.80. We continue to favour Suntec (BUY/ TP: S$1.45) as leasing activities
at Suntec Tower remains buoyant and expiring rents are marginally underrented. Suntec trades at attractive 8.6% yield for FY10.
Interesting small-cap REITs to watch. We believe acquisitions are in the works for FCT (BUY/TP: S$1.53). With a low cost-of-equity, we expect potential acquisitions to be DPU accretive. Cambridge REIT (BUY/TP: S$0.64) has a defensive business structure with an FY10 yield of 11.4%. We believe the stock
is a major laggard to A-REIT, trading at a spread of 4.4%, way above its historical average of 1.4%.
Link – Table
A-REIT – DMG
Lacking catalysts
Raising our target price to S$2.05 from S$1.72. Our DDM-backed target price reflects a lower cost-of-equity assumption of 8.2% (8.7% previously). We reduced our risk free rate assumption by 50bps due to continued low interest rates. A-REIT will be reporting 2QFY10 results on 19 Oct and we expect annualised DPU of 13.26¢, a 12.2% decline over FY09. The decline in DPU is attributed to the larger share base following its share placement exercise earlier this year. Maintain NEUTRAL. Recommend entry at S$1.80.
Occupancy expected to remain at healthy levels. Reflecting the stabilisation in global demand, occupancy rate for A-REIT’s multi-tenanted properties is expected to remain at 94%, unchanged over the preceding quarter. We expect overall portfolio occupancy to remain at 97% owing to the contribution from single tenanted buildings with long term leases. Through our channel checks, we have not heard of any recent tenancy defaults. Systemic hi-tech rents have been declining in tandem with office rents. However, as A-REIT’s hitech/ business park properties are still 20-30% below market spot rates, we expect rental reversion to remain positive.
Focus on built-to-suit and other acquisition opportunities. Following its S$296m equity fund raising exercise, A-REIT has a sturdier balance sheet with a gearing of 29.3%. With a gearing of below 30%, we believe there is little need for management to further recapitalise its balance sheet, easing concerns that our forecast dividend yield would be diluted. A-REIT has indicated that about S$120m of its recent proceeds could be used partly or wholly fund potential acquisition and/or built-to-suit development opportunities.
Still trading above heyday yields of 6%. At current prices, A-REIT offers investors a stable dividend yield of 7% for FY10 and FY11 – with dividends well supported by the long-term leases on single-tenanted buildings which accounts for 50% of revenue. Between 2005 and 2007, A-REIT traded at 6% forward yield. Our TP of S$2.05 offers a yield of 6.5%, a reasonable peg in our view. We recommend buy on dips as stock has rallied 80% since Mar 09.