CDL H-Trust – DMG
Legs To Ride The ‘V’ Recovery
Best proxy to a multi-year tourism resurgence. We initiate coverage on CDL Hospitality Trusts (CDLHT) with a BUY recommendation and target price of S$1.80. We are sanguine that CDLHT remains the best proxy to a multi-year tourism resurgence that will take place next year. CDLHT is our top pick among the large cap S-REIT counters. Price target is based on a 9.3% cost-of-equity assumption and a terminal growth rate of 3%.
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 3-5% 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 that is projected to come onstream 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. Even at our DDM-TP of S$1.80, yields stand at 6%, a conservative peg in our view. CDLHT trades at 7.2% FY10 yield, which in our view suggests that the stock has further legs to ride the ‘V’ recovery.
Shipping Trusts – UOBKH
Share Prices of US Peers Rally 30-60% wow
US peers rallied 30-60% wow; CCFI rebounded 26% from trough. Share prices of Danaos Corporation (DAC US) and Seaspan Corporation (SSW US), US peers of the Singapore shipping trusts, soared 58% wow and 32% wow respectively. The China Containerized Freight Index (CCFI) has rebounded 26% from its recent trough of about 750-945.3. We have not yet seen an upturn in the share prices of Singapore-listed shipping trusts similar to the recent rally of their US peers.
Stock Recommendations
FSLT. FSLT recently raised S$42m via a private placement to fund acquisitions. Accretive acquisitions will boost its distributable cash. However, the trust may need to raise equity for its outstanding loan balance of US$400m due for bullet payment in 2012 and 2014, and this may lead to yield dilution. Thus, we maintain HOLD on FSLT but raise our fair price from S$0.62 to S$0.70 based on a higher container shipping sector
2010F P/B of 0.91x (previously 0.81x).
PST. We forecast PST’s 2009 and 2010 dividend yields at 11.7% and 9.3% respectively after adjusting for the reduction in the distribution payout ratio from 90% to 70%. The cash retained will be applied to finance acquisitions. Accretive acquisitions may drive a re-rating of the stock. Maintain BUY with a target price of US$0.37.
RMT. We reduce our fair price from S$0.76 to S$0.55 based on a lower 2010F P/B of 0.32x (previously 0.40x), a shade below US peer Danaos’ P/B of 0.54x, because RMT would have a similarly very high net gearing of 4.0x, This is assuming the availability of debt financing for the US$712m capex due in 2H10 relating to the purchase of four containerships to be chartered to Maersk. RMT also has a US$130m loan facility due in Apr 10. While our fair price for RMT is 43% above its current share price, we maintain our HOLD call.
RMT is trading at a very low FY09 P/B of 0.31x. Should the trust overcome its financial hurdles by refinancing the US$130m loan, and by securing funding for its newbuilds, we expect a re-rating. At this juncture, the management is still seeking solutions to its financial hurdles.
Fortune – JPM
Proceeding with acquisition and rights issue – ALERT
• FRT will proceed with acquisition and rights issue: All resolutions for the proposed acquisition of the three properties and one-for-one rights issue were duly passed at the EGM held on 11 September.
• One-for-one rights issue at HK$2.29: Book closure date for rights entitlement is set at 17 September 5pm. The commencement of “nilpaid rights” trading period is yet to be determined but is expected to be no later than 23 Sept.
• Under-gearing still better than over-paying: The three new assets would be acquired at an average net yield of 5.1%, which looks fair. We believe this acquisition is much better than previous acquisitions done by other REITs where the sponsor sells assets at a high price into the REIT and uses a combination of financial engineering and aggressive gearing to initially maintain a high yield –it only delays the pain of overpaying for assets. Fortune REIT’s proposed acquisition is simple and straightforward, though the gearing level might even be considered a bit too conservative, in our view. The blended yield post acquisition would be still be high at 7.5% for FY10E and 7.3% for FY11E. Theoretically, investors could gear up externally (and buy more of the REITs) to engineer a higher yield on equity, though it may not be a viable option in reality.
• Maintain OW, Jun-10 PT HK$3.4: In our previous note dated 24 Aug 2009, we had already incorporated the contributions from new assets and also the dilution from the rights issue. Our Jun-10 NPV post acquisition and rights issue is HK$3.4/share. We maintain our ex-rights PT at HK$3.4/share, which is on par with the new NPV. Our price target is based on a discount rate of 6.57% and LT growth rate of 0.4%. Risks to our PT include higher than expected vacancy rates and prolonged economic recession.
CDL H-Trust – Phillip
A Satisfying Stay
We initiate coverage on CDL Hospitality Trust (CDL HT) with a BUY recommendation and fair value of $1.72. CDL HT currently owns hospitality related properties in Singapore and New Zealand. We believe the Trust is poised to benefit from the economic recovery coupled with the government efforts to boost the local tourism industry.
Tail-end of economic recession? Singapore technically exited the recession in 2Q09 with a q-q SAAR GDP of 20.7%. The official forecast from MTI is a contraction of 4% to 6% for 2009. That being said, the share price of CDL HT has re-rated from 0.3 times book value seen in March this year to approximately 1 times book value currently, on optimism of the recovering economy. We believe that CDL HT will continue to re-rate to its historical average of above 1.5 times book value seen during the economic boom of 2007 if the cards are lined up properly.
Tourism 2015. The Singapore government has set a target to achieve 17 million tourist arrivals and tourist revenue of $30 billion by 2015. Hospitality operators like CDL HT will stand to benefit from the government initiatives.
Healthy balance sheet. CDL HT has one of the lowest gearing among the S-REITs. We view this as prudence on management part in managing capital usage well. CDL HT has gearing of 19% and total debt of $287 million. We believe with the backing of a strong sponsor, it has better access to funding sources.
Strong sponsor, benefits aplenty. The sponsor of CDL HT is M&C Hotels plc which is majority owned by City Development Ltd. With a right of first refusal from the sponsor, there are ample acquisition opportunities for CDL HT to expand its portfolio. Furthermore, management has indicated that it has the expertise to operate its hotels if any of its lessees decides to terminate their leases.
FCT – OCBC
Poised for major league debut; upgrade to BUY
Physical integration a success. We visited Fraser Centrepoint Trust’s Northpoint mall (NP) to assess the success of the S$38.6m asset works. The goal was two-fold: transfer GFA from the fourth level to higher yielding lower levels; and fully integrate the asset with new extension Northpoint 2 (NP2) to create one seamless retail mall. The physical integration has been very successful, in our opinion. It is very hard to identify where NP ends and NP2 begins. The transition out of AEI is still taking place on upper levels as some tenants are still in the process of fitting-out.
But trust-level integration incomplete. We have commented on the lack of scale in FCT’s portfolio before and this is the most obvious opportunity: in essence, FCT owns only two-thirds of a prime asset. Despite a strong pipeline, FCT’s acquisition plans were put on hold when the credit crunch struck. Sponsor FNN [NOT RATED] continues to hold on to NP2 (85,500 sf). We believe that an acquisition is likely in the next six months as: 1) credit markets have stabilized; 2) FCT has re-rated strongly making an accretive acquisition more feasible; and 3) the market may prefer an acquisition to support another potentially cash-flow disruptive AEI project (now at Causeway Point). The put and call option agreement with FNN indicates a price range of S$139.5m to S$170.5m for NP2. We currently assume the buy is priced per the Sep-08 valuation of NP, at around S$1916 psf or S$164m. Note that YewTee Point (YT, 72,000 sf) is also “ready for acquisition”. If priced similarly, total acquisition cost is roughly S$302m.
Poised for major league debut. We have lowered our cost of equity assumption, changed our rent reversion assumptions from -5% and -7% in FY10-11 to 0% per year, and rolled over to FY10 (year end is 30 Sep). We also incorporate the NP2 and YT acquisitions at S$302m, with 70% of the cost funded via fresh equity at a 40% discount to the current price. This takes our fair value estimate from S$0.95 (at par to prior SOTP) to S$1.22. We turn positive on FCT as 1) acquisitions will create scale, enhancing FCT’s attractiveness for institutional investors (thus benefiting retail holders); and 2) the yield gap between FCT and CapitaMall Trust [HOLD; FV: S$1.53] is fairly wide even after allowing for a size and asset premium. Upgrade to BUY (16% total return). Our ideal entry point would be at any capital raising / acquisition announcement.