Suntec – DBS
Results in line
Suntec’s results were in line with expectations, with the reit still enjoying organic growth from positive rental reversions. Although we expect the group to continue to benefit from positive average rental revenue growth, the pace is moderated by the softer economic environment. While Suntec’s mixed portfolio of office and retail space offers investors relatively more resilience, there is unlikely to be near term catalyst to drive share price. Maintain Hold with DCF-backed TP of $0.79.
Low base effect. Suntec reported Oct –Dec 08 distribution income of $44.2m (DPU: 2.86cts), +32% yoy on a 16% higher revenue of $63.5m, thanks to organic growth across its portfolio. Retail revenue accounted for 55% of topline and benefited from higher renewal and replacement rents. Office income continued to enjoy positive rental reversions with quarterly transacted rents at Suntec Office averaging $11.20psf. Occupancy dipped slightly to 98.2% due to frictional issues. The group had changed its FY end to Dec and FY08 revenue and distribution income of $294m and $201m are based on 15-mth performance. Portfolio was revalued down by 7% over Sep 07 l evels, lowering bk NAV to $2.01 and lifting gearing to 34.3%.
Uncertain macro outlook. Weaker economic outlook going forward is likely to dampen demand for office space and moderate retail sales. Our current projections are for office rnts to dip 35% over this cycle with vacancies rising to 15% correspondingly. The group has 28% of its office portfolio and 39% of its retail NLA due for renewal in 09. While the group should enjoy positive rental reversions, owing to a low base, possible vacancy risks exist as demand for office space contracts. While occupancy level of its retail space is full, retail rents are likely to remain stable. Negotiations for refinancing its $700m CMBS due Dec 09 are already underway.
Lack of near term drivers. Suntec is offering FY09 and FY10 DPU yield of 13.6-15% and 0.3x P/bk NAV, in line with other office and retail S-reits. While valuation is compelling, given the lack of near term drivers, we maintain our Hold call with a target price of $0.79.
FrasersCT – DBS
Quiet Gem
FCT’s 1Q09 results spring no surprises as it delivered a DPU of 1.69cts on the back of resilient earnings from its portfolio of sub-urban malls. Looking ahead, earnings should remain stable with 90% of its income locked in. In addition, AEI activities at Northpoint will likely boost portfolio revenues and occupancy levels further when completed in Jun’09. As such, we believe that FCT should continue to deliver a sustained FY09-10 DPU yield of c.11%. Maintain buy, TP$0.81 based on DCF.
Results in line. 1Q09 distributable income of S$10.4m(+4.4% yoy) was within 25% of our forecast. DPU of 1.69 Scts was a 4% growth from that a year ago. Gross revenues and NPI were slightly weaker yoy at S$19m (–3%) and S$12.8m (–8%) respectively, due to planned vacancies at Northpoint offset by continued positive rental reversions at Causeway Point. NAV stood at S$1.23 with a low gearing of c.29%.
Defensive earnings. 90% of FY09 income locked in. With over 90% of its FY09 income already locked in, we believe that FCT, with its portfolio of sub-urban malls, should continue to deliver stable cash flows over the course of the current recession. Major mall anchors like Cold Storage and Food Junction catering to serving daily necessities, F&B and non-discretionary spending is likely to keep consumer traffic high.
Maintain Buy. We believe that FCT should continue to deliver a sustainable 11% FY09-FY10 DPU yield to unitholders. Catalyst for the stock will stem from future asset injections in the medium term when capital and credit markets ease, which will improve the liquidity of the stock. Maintain BUY.
FrasersCT – CIMB
Addressing tenant sustainability
• Met expectations. 1Q09 results were in line with Street and our expectations. DPU for 1Q09 was 1.67cts, 24% of our full-year forecast. Gross revenue of S$19.5m deteriorated 3.2% yoy due to planned asset enhancement work at Northpoint. Additionally, property expenses increased 7.5% on higher property taxes. However, net property income margins improved to 65.9% from 63.8%, supported by doubledigit growth in rental reversions for Causeway Point (+18.9%) and Anchorpoint (+17.5%). Portfolio occupancy climbed to 88.7% from 87.7% in 4Q08 as occupancy at Northpoint improved despite ongoing asset enhancement work.
• Budget measures to aid retail tenants. A 40% property tax rebate for commercial buildings has been announced in Budget 2009. Management will be passing on the rebate benefits to its tenants. While this will not result in DPU improvements, it should help to retain tenants, who are facing increasingly difficult retail sales. Other fiscal measures which would ease tenants’ operating costs and stimulate retail spending include: 1) a 12% cash grant of up to S$300 of each employee’s monthly wage to businesses; 2) the underwriting of bank loans to SMEs by the government; 3) a 20% personal income tax rebate, capped at S$2,000; and 4) additional GST credits for households.
• Maintain Outperform and target price of S$1.06. We maintain our DPU estimates. The government’s fiscal measures and management’s decision to pass on tax-rebate benefits to tenants should support tenants’ business sustainability in the short to medium term. FCT remains our preferred pick for suburban retail exposure for its lower 0.52x P/BV vs. CMT’s 0.6x. Maintain Outperform.
AscottREIT – DBS
Murky Skies
ART reported a good set of FY08 results backed by a strong underlying portfolio performance. Unitholders were rewarded with a DPU of 8.78 Scts, translating to a 17% yield based on today’s closing price. Looking ahead, we view catalyst for the stock appears lacking in the near term while negative headwinds are likely to impair stock re-rating. Maintain HOLD, TP S$0.61.
Results in line. FY08 distributional income of S$53.6m, DPU of 8.78 Scts were in line with expectations. Gross revenues and Gross profits increased 24% and 37% to S$193.4m add S$69.7m respectively, driven by organic RevPAU growth of 10% to S$145 and contribution from new assets.
Outlook challenging. While results were the group’s strongest since listing, outlook in FY09 remains challenging due to decreased business activity at its major operational markets, leading to slowing demand for its serviced residences. Management guides that booking volumes have softened and expects FY09 performance to be weaker sequentially. Our forward FY09-10 DPU estimates of 7.8 Scts reflect a 10% decline in portfolio RevPAU. Downside risk exists in the event of a more than expected decline in economic activity at its major operational markets
HOLD for further earning visibility. Facing an uncertain outlook coupled with continued negative newsflow of a worsening economic environment, we view that these might limit stock price performance in the near term. Re-rating opportunities will largely be macro-led, hinging on an improved economic outlook in their main operational markets, i.e Vietnam, Singapore and China. Maintain HOLD.
AscottREIT – CIMB
More vulnerable
• Met expectations. 4Q08 and full-year DPU numbers were in line with Street and our expectations. Full-year gross revenue of S$192.4m was up 24.2% yoy on strong performances from Singapore (higher daily rates), Australia (Somerset St George’s Terrace, Perth acquired last year), China (higher daily rates during Olympics), Japan (rental housing) and Vietnam (higher daily rates). NPI margins fell qoq from 52.5% to 43.9% on declines in Singapore, Japan and China. Significantly higher property expenses in Singapore and Japan, as well as room-rate declines after the Olympics in China caused the dip in NPI margins.
• REVPAU declined 18.4% qoq. Although REVPAU only dipped 3.6% yoy to S$133, the qoq decline was much starker at 18.4%. Declines were led by ART’s major markets of China (-43%) and Singapore (-12.2%). The average length of stay had also fallen from more than eight months in FY07 to seven months, the result of increased customer preference for shorter leases of under one year.
• Cap rates, asset leverage up. As at 15 Dec 08, ART’s portfolio value declined by S$88.9m, mainly because of lower valuation for its serviced residences in China and Japan. Cap rates expanded by 50-100bp in the latest valuation. With this valuation, asset leverage rose to 38.1%, still healthy.
• Bracing for tough times. Management admits that the challenges ahead are “unprecedented” and expects 2009 to be weaker than 2008. However, capital management remains prudent and the bulk of refinancing (S$382.5m) will only be due in 2011.
• Maintain Underperform and target price of S$0.56. We maintain our DPU estimates for FY09-10 and introduce FY11 forecasts. Forward yields of 14% and a P/BV of 0.32x make the stock cheap vs. the REIT average of 0.41x. Nonetheless, due to the short tenure of serviced residences vs. traditional property segments like industrial and commercial, ART remains more vulnerable to profit volatility in a deteriorating economic environment. Maintain Underperform.