Cambridge – Phillip
For FY08, CIT recorded 36.4% rise in revenue, 37.1% rise in net property income
and a 4% drop in DPU. Full year revenue is $72.3 million and DPU is 6.012 cents.
Revenue analysis. Revenues over FY07 and FY08 have increased steadily which reflect the contribution from acquisition as well as the rental escalation component of leases. Net property income is very much in line with revenue growth, however distributable income starts showing a decline from 2Q08 onwards. DPU on the other hand is dismal and has been declining since 4Q07, partly due to the dilutive effect of the equity fund raising carried out in October 2007.
CIT has secured refinancing for its debt of $369 million through a 3 year term loan of $390.1 million. The current gearing is 37.8%. The loan comes at a substantially higher interest of 6.6%(including amortization of upfront cost). We estimate the cash interest circa 5.0%.
Changes at the top. Chris Calvert (former CEO of MacCarthurCook Industrial REIT) was appointed the CEO in Dec 2008 in place of Wilson Ang. Through a series of transaction, NabInvest and Oxley Group have bought over the 80% ownership of the REIT manager with the remaining 20% still under Mitsui Limited. We remain hopeful that the new management team will do more to add value to investors.
Valuation. We think the higher borrowing cost will continue to be a drag on distribution. We are also factoring in higher tenant vacancies to reflect the macro economic conditions. We revise down our gross revenue forecast for FY09F and FY10F by 3% each and assume a borrowing cost of 5.0%. Accordingly, our DPU forecasts for FY09F and FY10F fall 12% and 11% to 4.73cents and 4.99 cents. Fair value is also lowered to $0.27. We lower our call from Buy to Hold.
CMT – BT
CapitaLand rises, CMT falls after rights issues
CAPITALAND and its listed retail trust CapitaMall Trust (CMT) announced massive rights issues on Monday.
But while CapitaLand’s $1.84 billion one-for-two rights issue has been well-received by analysts and the market, CMT’s $1.23 billion nine-for-10 rights offer has not fared as well.
Analysts rushed to issue ‘buy’ calls on CapitaLand after the developer said it was raising money to boost its war chest to $6 billion as it searches for acquisitions. CMT, on the other hand, was criticised for an ‘unwarranted dilution’.
The market seemed to agree yesterday. CapitaLand shares gained 11.4 per cent or 27 cents, to close at $2.63. But CMT lost 6.2 per cent or nine cents to close at a one-year low of $1.36.
Merrill Lynch upgraded CapitaLand to ‘buy’ from ‘underperform’, while OCBC Investment Research upgraded it to ‘buy’ from ‘hold’. CLSA, Kim Eng, UBS Investment Research and UOB-Kay Hian all reiterated ‘buy’ calls too.
‘We believe the cash raised provides CapitaLand with the financial flexibility to ride through challenging property markets, enhance market positioning and, more significantly, the ability to take advantage of opportunistic acquisitions,’ Merrill said.
A few firms were less bullish. Citigroup, CIMB and Nomura maintained their respective ‘sell’, ‘underperform’ and ‘reduce’ recommendations. Citigroup said the rights issue will be a drag on CapitaLand’s return on equity.
Goldman Sachs, which has a ‘neutral’ call on the company, said the rights issue is sufficient to address investor concerns over book value erosion from land bank provisions and associated asset value declines (from listed trusts), which Goldman estimates could be around $1.9 billion spread over the next two or three years.
‘With the sizable rights offering, we see no further need for capital raising in the next two years into the downturn, as the company has said it plans to revisit project commitments,’ said Goldman analysts Paul Lian and Natasha Parchani.
A successful rights issue would refocus attention on CapitaLand’s capacity to benefit from the current market environment as it is more likely than its peers to generate net asset value growth in the next two or three years, the analysts said.
Reviews for CMT’s $1.23 billion rights issue were more mixed. The trust intends to use the bulk of the proceeds to pay off $956.2 million of debt due this year.
CLSA downgraded CMT from ‘outperform’ to ‘underperform’. In contrast, OCBC upgraded the stock from ‘hold’ to ‘buy’.
‘While the proceeds will help the company repay debt and lower gearing to 29.1 per cent (from 43 per cent currently), we see the rights issue to be rather value dilutive,’ said CLSA analyst Yew Kiang Wong. The cost of retired debt, at 3.4 per cent, is much lower than the cost of equity, CLSA noted.
But OCBC analyst Foo Sze Ming said the rights issue is not driven by refinancing issues and is instead for the ‘long-term sustainable growth of CMT’s portfolio’.
‘By paring its gearing level now, CMT will have better financial flexibility to take on opportunities for asset enhancement initiatives and acquisitions in future,’ Mr Foo said.
CMT – OCBC
Gearing concern removed; Upgrading to BUY
Rights issue at steep discount. CapitaMall Trust (CMT) yesterday announced that it will be doing a 9-for-10 rights issue at an issue price of S$0.82 per rights unit. Issue price is at a steep discount of 43.4% to its closing price of S$1.45 prior to the trading halt. Approximately 1.5b units will be offered, raising gross proceeds of S$1.23b from the exercise. This rights issue came as no surprise as we had already previously stated our view that a balance sheet recapitalization may be needed for CMT. Of the proceeds raised, S$956.2m will be used to repay the borrowings due in 2009 and the estimated remaining amount of S$246m (less estimated issue expenses) will be used for asset enhancement initiatives (AEI), general corporate and working capital purposes. After the rights issue, CMT’s gearing will reduce from 43.2% to 29.1%.
Positioning for long term sustainable growth. Given its A2 credit rating by Moody’s and portfolio of quality assets, we do not think that the rights issue exercise is driven by refinancing issues. Instead, we believe that the purpose of the rights issue is for the long term sustainable growth of CMT’s portfolio. By paring down its gearing level now, CMT will have better financial flexibility to take on opportunities for AEIs and acquisitions in future.
Strong support from sponsor. As a demonstration of support for CMT’s rights issue, CapitaLand has agreed to subscribe for its proportionate rights units and also to subscribe for the excess rights units that are not validly subscribed, subject to a maximum total subscription limit of 60% of the total rights units.
Revising down our FY09-10 DPU forecasts. Taking into consideration the dilution impact of the rights issue, we are now revising down our FY09 DPU forecast by 37.3% from 14.5 S-cents to 9.1 S-cents. Our FY10 DPU forecast has also been revised down by 37.8% from 15.1 S-cents to 9.4 Scents. Upgrading to BUY. There is no change to our RNAV estimate of S$1.94 per share, but we are lowering our RNAV discount from 20% to 15% after our gearing concern has been removed. As such, our fair value of CMT has now been raised from S$1.55 to S$1.65 and our ex-rights fair value will fall to S$1.26. As there is a potential upside of 13.5%, we are upgrading CMT from HOLD to BUY.
Rickmers – OCBC
Deadlocked by order book
US$3.5m provision but otherwise steady. Rickmers Maritime (RMT) posted a 11.4% QoQ increase in 4Q08 revenue to US$29.6m. The results met our expectations except for a surprise US$3.5m non-cash provision for vessel impairment on Maersk Djibouti (about 5.5% of FY09F revenue). It is the trust’s only vessel at risk for early lease termination, from February 2010 onwards, per its charter terms. As a result, net profit fell 25.7% QoQ to US$7.2m. RMT will pay out 2.25 US cents for the quarter, flat QoQ and up 5.1% YoY. This translates to an annualized yield of 34% and a distribution payout of 63%. The manager said that given current conditions, it would not provide any guidance on FY09 DPU.
Large funding needs. RMT’s gearing has increased from 1.1x debt-toequity at 30 September to 1.5x as at 31 December. In January, RMT took delivery of its 14th vessel, MOL Destiny for US$72m. Including the January vessel, RMT is contracted to acquire US$1.1b worth of containerships over the next two years. RMT has credit facilities in place to fund the FY09 vessels costing US$420m in all. If the FY09 buys are fully debt-funded, we estimate RMT’s gearing will hit an unsustainable 2.7x on existing equity levels by year end.
And a large funding gap. Assuming the existing facilities are fully utilized, we estimate RMT would need to repay around US$17.9m of debt in FY09 and another US$157m in FY10. Additionally, RMT has yet to arrange funding for the US$711.6m vessels due in FY10. We believe the market value of those vessels would have taken a hit versus the asset cost pre-fixed by RMT. So even if lenders provide 100% loan-to-market value, it would not cover the cost of the vessel. The time for a fresh equity issue is fast approaching. An equity issue in FY09 itself is, in our opinion, necessary to strengthen RMT’s negotiating position with lenders.
Deadlocked until orderbook is ‘resolved’. The manager has so far only said that it “is exploring all options” to finance its order book but this is not enough. The market needs more clarity on financing conditions, the extent of fresh equity required, and the odds of ‘disappearing’ order book (through an outright vessel sale, a sale-and-leaseback or a sponsor “bailout”). A potential loan-to-market value covenant breach is another risk. The outcome of such a breach would depend on the health of RMT’s blue chip charterers and the risk appetite of its lenders. Maintain HOLD with S$0.40 fair value.
Rickmers – DBS
Financing remains key
Rickmers Maritime did not surprise and maintained its quarterly DPU payout of 2.25 UScts, in line with steady operating performance. We believe the payout can be sustained in FY09. However, RMT still needs to find a solution to its committed FY10 capex needs of US$711m. In addition, near term refinancing needs include a US$130m bullet repayment due in 1H10. With spot charter rates currently hovering around 50-60% below contracted long term charter rates, the risk of renegotiations cannot be ruled out either. Hence, we maintain HOLD at a reduced target price of S$0.40.
Net profit affected by impairment charges. In a prudent move, RMT took a US$3.5m impairment charge on the Maersk Djibouti vessel to account for the risk that Maersk may exercise the early termination option by Feb’10. No other vessel has this clause, however.
Current Loan to Value ratio is within range but risks persist. Data from Clarksons Research indicates that newbuilding prices for similar vessels as those on RMT’s orderbook may have fallen 10-12%. We estimate one of the loan tranches, a US$288m facility financing the 5 Mitsui ships, may be at risk of technical default.
FY09 DPU should be stable, but lack of visibility. RMT will add 5 vessels to its portfolio this year, fully financed by existing credit lines. This should ensure enough cash flows in FY09 for RMT to maintain the 2.25 UScts quarterly payout, even while conserving cash. However, with financing uncertainties looming, dividend visibility may be clouded beyond that. In our forecast numbers alongside, we assume a 60% debt-funded potentially dilutive acquisition scenario. But our target price of S$0.40 is derived as the average of fair values under 3 probable scenarios – I) as described above, ii) non-realization of above acquisition and cash flows accruing only from portfolio as of end-FY09 and iii) inability to conclude near-term refinancing deals.