CLHTrust – CIMB
IR catalyst from 2010
• Maintain Outperform. Management guides that 2Q09 results could be weaker than in 1Q09. However, an increased number of conventions and events in the second half of 2009 is expected to support full-year performance. We believe that CDL-HT remains well-positioned to benefit from the tourism boost that the two integrated resorts (IR) should bring about from 2010. Chinese and Indian tour agencies are already marketing Singapore as a single tour destination (as opposed to the traditional marketing of Singapore as a stop-over destination, or lumped together with its neighbouring countries). This should have a significant impact on the length of visitors’ stay in Singapore, and hence REVPAR levels for Singapore hotels.
• Upgrading our estimates. We increase our occupancy forecast for CDL-HT’s Singapore portfolio to 82% from 80%. We also raise average room rate expectations to 3-5% growth from 5-10% declines earlier, over 2010-11. Additionally, with its last refinancing in Apr 09, CDL-HT will have no more debt due till FY12. We reduce our cost of debt assumptions to 4% from 4.5% to factor in lower-than-expected spreads obtained. We also use a lower discount rate 10.6%, down from 10.8% as we apply a lower risk-free rate of 4.8% across our universe.
• DDM-derived target price raised to S$0.99 (from S$0.68). Following the changes in our estimates, our target price rises to S$0.99. We continue to like CDL-HT for its low asset leverage of under 20%, and mid-tier portfolio, which would enable it to stay resilient despite the weak tourism outlook.
CCT – CIMB
Bleak outlook
• Maintain Underperform. CCT’s rights issue, completed in Jul 09, has strengthened its balance sheet to 31% leverage from 43%, at a price of a doubled share base. There remains large debt due for refinancing over 2010-11 while the outlook for office-sector rents remains bleak for the next three years with a large supply in the pipeline. Taking into account its pared-down debt, we estimate implied yields at 6.3%, translating into expected rents of S$5.20psf. We expect another round of asset devaluations to close the gap between implied and actual yields.
• Evidence of pick-up in leasing volumes. Recent evidence of increased leasing volumes following a sharp fall in market asking rents suggests that our earlier occupancy assumptions might have been too severe (we were expecting a fall to the last crisis levels of about 85%).
• DDM-derived target price raised to S$0.76 (from S$0.71). We now expect office occupancy to decline to 93% over 2009-11, instead of 88%. Additionally, we use a lower discount rate of 10.2% (from 10.4%) based on a lower risk-free rate of 4.8% applied across our REIT universe. Our new target price prices in three consecutive years of decline in DPU. We maintain our Underperform rating as catalysts within the three years are still lacking.
ART – CIMB
Less depressed expectations for 2010
• Guidance for 2Q09. ART guides that its 2Q09 earnings are likely to remain weak, but with a slower rate of decline compared with 1Q09. ART’s top four contributors (73% of revenue) are Vietnam, China, the Philippines and Singapore, in order of contribution. REVPAU in Vietnam and Singapore is stable, supported by a long-stay segment and improved occupancy, while the Philippines has recovered strongly and earnings are likely to supersede 2008’s. China’s REVPAU continues to decline due to a supply overhang in Beijing. We continue to expect a 13% decline in overall REVPAU for this year.
• Reviewing estimates. Although the outlook for global business travel still lacks clarity, concerted global efforts to ease the financial crisis have improved liquidity conditions, resulting in a general revival of confidence. We believe this will translate into stable global business travel in due time. As such, we revise our FY10-11 REVPAU assumptions to reflect 0-5% growth, vs. 0-15% decline previously.
• Higher DDM-derived target price of S$0.79 (from S$0.56). Our DPU forecasts for FY10-11 increase by 14-17% following changes to our assumptions. We now use a lower discount rate of 10.3% from 10.5% on a reduced risk-free rate of 4.8% which is applied across our REIT universe. Current P/BV appears attractive at 0.5x vs. SREITs’ 0.6x. Price catalysts look limited in the short term. However, due to the volatile nature of the hospitality industry, the impact of increased REVPAU on revenue when the economy turns would be felt in a much shorter span of time.
AREIT – CIMB
Fully valued
• Maintain Neutral. The outlook for the industrial market remains poor. Occupancy of AREIT’s sale-and-leaseback buildings is likely to hold at 100%, while that of its multi-tenanted buildings is likely to decline due to downsizing by tenants. However, we expect the fall in occupancy to be moderated by modest rental reversions for the Business & Science Parks and Hi-Tech segments due to a significant gap between passing rents and market rents; as well as development projects completed last year and this year. A-REIT remains one of the most diversified industrial REITs by segment and number of tenants.
• Declining office rents diminish attraction of business park/hi-tech space. More than 50% of A-REIT’s assets by value are business park/hi-tech space. With office rents falling sharply in the last six months, the rental gap between business park/hitech space and prime office space has narrowed sharply, diminishing the attraction of these industrial segments to office users. Although we do not expect an exodus of office users from business park/hi-tech space, we anticipate that asking rents and new take-up will be under pressure.
• DDM-derived target price raised to S$1.68 (from S$1.63). We maintain our estimates but use a lower discount rate of 8.5% (from 8.7%) based on a lower riskfree rate of 4.8% applied across our REIT universe. P/BV for AREIT has risen to 1.0x vs. the sector average of 0.6x, making it the most expensive REIT. At current levels, we believe AREIT is fully valued.
FCOT – DBS
Emerging from the ashes
• All in one recapitalization package to solve financing woes
• ATP deal a stabilizing factor
• Look beyond near term DPU dilution to underlying implied distressed valuation pricing
• HOLD with TP $0.12
All in one. FCOT is proposing a recapitalization package involving a S$213.9m 3-for-1 rights issue to largely pare debt, refinancing up to S$675m loans and acquisition of Alexandra Technopark to be funded using convertible perpetual preferred units and backed by a 5-year master lease agreement. The end result of a much lower gearing of 38.5% and an improved interest cover of 2.7x, both which are well within covenant limits, would put the reit on a much stronger financial footing.
Purchase of ATP a stabilizing factor. Furthermore, the acquisition of Alexandra Technopark is earnings accretive and will result in greater income stability and lower forex exposure for FCOT. The reit’s portfolio will be more Singapore-centric with 59% of assets situated locally while strong underlying master leases will mean that 74% and 65% of gross rental income at the start of FY11 and FY12 are secured, leading to better income visibility.
Near term DPU dilution but stock valuations already pricing in implied distressed prices. We estimate FCOT’s FY09-10F DPU to be diluted by 35- 64% to 2.2cts and 1.2cts and book NAV lowered 60% to $0.26. We believe investors should look beyond the near term DPU dilution to the underlying value of the reit. The TERP of $0.131, calculated based on the last closing price on the date of announcement, is at 0.50x P/adjusted book NAV and implies distressed valuation pricing to the underlying asset value. Our TP of $0.12 is based on discounting income from existing properties, which are supported by inbuilt organic rental growth structures and adjusted for the rights issue but before CPPU conversion. In the longer run, potential rationalization of the Japanese properties and value enhancement possibilities of the Singapore assets due to their proximity to new MRT stations of the upcoming Circle Line would create further value within the portfolio.