CRCT – DBS
Rich valuations
• Results in line
• Asset devaluation brings NAV down to S$1.16
• Operational outlook remains mixed
• Valuation appears rich, downgrade to FULLY VALUED, TP S$1.04, representing potential downside of 20%.
Results in line. CRCT’s 2Q09 results were within expectations. Gross revenue and NPI increased by 15% and 17% respectively to S$30.4m and S$19.4m. This growth was brought about by a combination of an appreciating RMB vs S$ and increased occupancies at Qibao and Xinwu malls, which offset the 10% decline seen at Saihan. Distributable income grew by c.17% to 13.3m, translating to a DPU of 1.94 Scts. NAV down to S$1.16. CRCT devalued its assets by $9m or 1% of its portfolio, thus lowering its NAV to S$1.16. As a result, gearing increased slightly to 34%.
Mixed operational outlook. Portfolio occupancy weakened slightly by 1 ppt to 95.7%, as a result of lower occupancy level at Saihan mall (87% from 94%) – currently undergoing enhancement works, which is projected to only complete by end of the year. Rental reversions remained negative in WangJing and Xizhimen, which are offset by better performances at Xinwu and Saihan. Rental outlook remains tough, as tenants are cautious on their expansion plans and commitment to longer-term leases. CRCT is possibly looking to tie tenants on shorter leases to improve occupancy levels.
Downgrade to FULLY VALUED, TP $1.04. While we like CRCT for its exposure to the China consumption and urbanization story in the long term, valuation at current level – above its NAV appears rich, when compared against the sector’s average of c0.7x P/BV. As such, we downgrade the stock to FULLY VALUED, TP maintained at S$1.04 based on DCF ( WACC of 10% ,terminal growth 4%). CRCT offers a FY09-10F yield of 6.5-7.3%.
FSL – BT
FSLT cuts distributions to reduce debt
It will pay 2.45 US cents per unit for Q2, down from 2.8 a year earlier
FIRST Ship Lease Trust (FSLT) has cut its guidance for future payouts to unitholders to retain cash for repaying its debts, the latest sign of the pressure faced by shipping trusts here.
It will pay US$12.7 million, or 2.45 US cents per unit, for the second quarter, down from 2.8 US cents a year earlier and unchanged from the first quarter of this year.
That represents 74 per cent, or nearly three-quarters of the trust’s US$17.1 million net cash from operations for the three months to end-June. The remaining cash was used mainly to reduce its debts.
From the third quarter, however, it expects to pay out just 1.5 US cents per unit, or about half its free cash flow – the cash generated from operations, less any capital spending. The retained cash will be used to pay down its debt voluntarily to achieve ‘a more balanced capital structure’, it said.
FSLT’s share price fell yesterday after the announcement, ending 4.3 per cent lower at 66 cents.
Philip Clausius, chief executive of FSLT’s trustee-manager, said that ‘all our lease contracts continue to perform as expected’ despite the difficulties faced by the shipping industry worldwide.
‘Notwithstanding the very challenging market conditions, our broadly diversified lease portfolio remains robust and we expect it to continue generating stable cash flows.’
Its lease revenue rose 20.2 per cent to US$24.8 million in the three months to end-June, compared to a year earlier. FSLT said that none of its lessees has tried to renegotiate lease terms and that all lease rentals have been received promptly, including the rentals for this month.
The distribution reinvestment scheme, which gives unitholders the choice of receiving their distributions in the form of new units instead of cash, will not apply to the second-quarter payout, FSLT said. In the first quarter, the scheme saved the trust US$3.8 million in cash, which FSLT said would be used mainly to reduce its debt.
When FSLT listed here in March 2007, it had no debt. After listing, however, it funded a rapid expansion of its fleet by taking on more than US$500 million in bank debt to add 10 vessels to its initial fleet of 13. When the financial crisis struck last year, FSLT and Rickmers Maritime, another Singapore-listed shipping trust with substantial debt funding, were hit by higher interest costs as lenders invoked market disruption clauses and a plunge in demand for ship charters.
In October, FSLT cut its guidance for fourth-quarter distributions to 3.08 US cents per unit from 3.11 US cents due to the higher interest expense. In January, it said it would stop its policy of paying out all its distributable cash each quarter and instead use some of the cash to pay off its debt.
Since the start of this year, FSLT has been reducing its debt voluntarily, though it still has a large amount left. At the end of June, FSLT had US$501 million in secured bank loans outstanding, compared with US$513 million at the end of last year.
But FSLT stressed that all its vessels are fully financed and that it has no need to refinance any loans until 2012.
Mr Clausius said FSLT would continue to reduce its total debt and talk to lenders regularly to avoid any potential breaches of loan-to-value covenants that could be triggered by a fall in the value of vessels.
K-REIT – Nomura
First look
KREIT’s core operating performance in 2Q09F was better than we expected as management continued to roll over leases at higher rents. However, with further deterioration in portfolio occupancy, we believe focus will shift towards trading rental growth for occupancy, and we expect full-year rental income growth to move in line with our forecast. Trading at an implied EV of S$994psf, we believe downside risk in KREIT’s portfolio valuation is more than priced in.
Focus shift towards occupancy
K-REIT – Daiwa
Positive rental reversions continue
What has changed?
• K-REIT Asia (KREIT) announced 2Q FY09 results on 20 July. Distribution per unit (DPU) of 2.64¢ was 21.8% above our forecast.
Impact
• KREIT’s net-property income, up 13.8% QoQ, was 27.7% above our forecast, helped by an easing of property taxes and other expenses.
• Top-line growth, up 3.9% QoQ, was also impressive, considering that occupancy for KREIT’s properties (excluding its one-third stake in One Raffles Quay, which was fully occupied) deteriorated slightly to 92%, from 93.4% at the end of March. Even though spot rents continued to fall, KREIT’s lease renewals were still accretive because passing rents increased QoQ for all properties and expanded overall to S$7.11 per square foot/month (from S$6.71 per square foot/month for 1Q FY09).
Valuation
• We have raised our target price to S$1.23 from S$1.03, based on our RNG valuation method, after lowering our effective cap-rate assumption to 5.75% from 6.5%. As with all office S-REITs, we use 2008 core-operating distribution as the basis for our valuation since it captures what we believe is a reasonable mid-cycle passing rent (about S$5.64 per square foot/month for its investment properties).
Catalysts and action
• We have revised up our DPU forecasts by 14.5% for FY09, 6.1% for FY10, and 6.2% for FY11 on higher rental renewal assumptions. We have also lowered our operating expense assumptions and assume that the manager can maintain overall occupancy at 92% for the rest of 2009 before the occupancy falls to an estimated 87% for 2010 due to the addition of new office supply.
• We maintain our 2 (Outperform) rating for KREIT because we believe it is one of the few S-REITs that offer value. Our target-price is based on 0.55x on our June 2009 NAV. Even though the manager did not revalue the properties, we believe the debt-to-asset ratio of 27.8% is highly defensive. How attractive KREIT remains will depend on the results of the other S-REITs, in our view.