CitySpring – OCBC
Unique infrastructure assets bear a closer look
High dividend yields. CitySpring Infrastructure Trust (CitySpring) is a listed business trust. Business trusts are able to pay distributions out of operating cash flows consisting of both accounting profits and non-cash charges such as depreciation. Consequently, the trust is able to offer a high dividend yield of 8.8%, based on its most recent quarterly payout.
Strong asset portfolio. What differentiates CitySpring from other listed trusts is its unique portfolio of infrastructure assets. It came to the market in February 2007 with two local assets – City Gas and SingSpring. City Gas is Singapore’s only producer and retailer of piped town gas. SingSpring is Singapore’s only supplier of desalinated water to the Public Utilities Board. It is considered a key diversifier as part of the government’s “four taps approach” for Singapore’s water sources. After its IPO, CitySpring has gone on to acquire Basslink, an electricity interconnector in Australia.
Features unique to infrastructure assets. These assets essentially operate as regulated monopolies with regulated tariffs (City Gas) or longterm contracts and concessions (SingSpring and Basslink). SingSpring and Basslink enjoy a revenue model distinctive to infrastructure assets: as both are considered key strategic assets, they are compensated by availability – not by utilization. Such a revenue model is untouched by industry cycles unlike say, shipping trusts or REITs, making cash flows truly stable and predictable over the long haul.
A key risk is a changing regulatory landscape. For instance, it is expected that City Gas’ domain will be restructured and liberalized over seven to nine years. Nevertheless, CitySpring believes that steep economies of scale in the residential segment and a 600,000 strong customer base will make City Gas a formidable incumbent.
Basslink acquisition DPU accretive, but not yet. CitySpring’s S$1.5b Basslink acquisition was intended to be 75% debt and 25% equity funded with trust parent Temasek initially providing an S$370m equity bridge facility. We note that Basslink currently does not contribute to the trust’s distributions – its contribution was originally supposed to kick off after the planned equity issue took place. Given current market conditions, it seems most likely CitySpring will instead resort to more debt funding for now. If the equity issue is indeed shelved, it is unclear when Basslink will start being accretive to the trust’s DPU and by how much. CitySpring is currently trading at S$0.725, a 10% discount to its NAV and a 19% discount to its IPO price. We do not have a rating on this stock.
MMP – UOBKH
Evaluating proposals from strategic review
Received various proposals from third parties. Macquarie Pacific Star Prime REIT Management, manager of Macquarie MEAG Prime REIT (MMP REIT), has embarked on a strategic review with the objective of enhancing value for all MMP REIT unitholders. The manager has received a number of indicative proposals from third parties and is in the process of reviewing these proposals. Macquarie Real Estate Singapore, the largest unitholder with a 26% stake in MMP REIT, continues to support the strategic review.
Reiterate BUY recommendation. We like MMP REIT for strategic frontage on Orchard Road. MMP REIT benefits full year contribution from overseas investments in China and Japan in FY08. The on-going strategic review could also unlock value for investors. MMP REIT provides FY08 distribution yield of 6.08%. Our target price is S$1.55 based on two-stage dividend discount model.
CRCT – Goldman Sachs
Discounting the pace of acquisition growth; maintain Sell
What’s changed
Since its placement and maiden acquisition of Xizhimen Mall (Beijing) in early Feb 08, CRCT’s stock has fallen ~22% and is now trading below the placement price of S$1.36; it has declined ~62% from its Oct 07 peak. Higher funding costs and uncertainty in realizing the value of an impressive acquisition pipeline have weighed on the shares, in our view. Across the SREIT universe, we continue to favor stocks with strong organic growth over those for which acquisition growth is a key driver. Maintain Sell.
Implications
For much of its trading history (Dec 06 listing), CRCT, fueled by investors focused on its acquisition growth prospects, has traded at distribution yields (i.e., funding cost) that have facilitated accretive acquisition growth. However, with CRCT trading at a 6% 08E yield, we believe it will be difficult for the company to raise equity to fund growth. We view CRCT’s exposure to Chinese domestic consumption as positive and see value in its right of refusal to about 65 malls from CapitaLand and its funds, of which 16 malls are operational. But we think the challenge of raising equity could cast doubt on CRCT’s target to grow portfolio size from S$1.1 bn today to S$3 bn by 2009. We note CRCT’s leverage of 31.6% vs. regulatory cap of 35%
means acquisition growth needs to be largely equity funded. Also, S$171 mn of debt is due for refinancing end-08.
Valuation
We have removed acquisition premiums in setting TPs for most REITs under our coverage, but not for CRCT. Our new DCF-based 12m TP of S$1.46 (vs. S$1.80 previously) comprises a base-case S$1.25 (unchanged) and premium of S$0.21 (vs. S$0.55), reflecting a 50 bp rise in funding costs and slowdown in the pace of acquisitions to S$450-500mn p.a. till 2010.
Key risks
Performance of the underlying malls could surprise on the upside.
HWT – DBS
Ready To Surf Up
Story: Hyflux Water Trust (“HWT”) is the first pure-play water trust to be listed in the region and should benefit from strong market fundamentals in the water infrastructure sector in China.
Point: The initial portfolio consists of water-related assets – water treatment plants, wastewater treatment plants and water recycling plants – capable of supplying a total capacity of 445,000 cu m / day in key industrial belts of high growth provinces in China. Growth potential in the initial years will stem from completing plants and escalating utilization rates of existing plants, which could lead to an 82% increase in annual tariff receipts over 2008-2010. Additionally, Hyflux has granted HWT the rights of first offer and refusal (“ROFOAR”) to a pipeline of assets with total design capacity of 760,000 cu m/ day, all ready to be injected into the trust in tranches every 12-18 months. HWT’s debt free position at IPO also leaves significant headroom for debt-sponsored acquisitions in the future.
Relevance: HWT is a defensive earnings play with predictable cash flows, promising a DPU yield of of 7-9% for FY08 and FY09. At current valuation of 0.88x P/BV, HWT compares favourably with REITS and other infrastructure/ shipping trusts listed in Singapore, but with a much higher debt headroom to fund stronger growth potential. We believe the counter will outperform over time as HWT begins to deliver on it post-IPO acquisition schedule, just as market has favoured developer-backed REITs which have delivered on their acquisition promises. We initiate coverage on HWT with a BUY call at a DDMbacked Target Price of S$0.78 (WACC 10.0%).
CCT – CIMB
CCT to issue S$280m of convertible bonds
CCT issues bonds to fund acquisition and asset enhancement. CCT announced that it would issue no less than S$280m of bonds of 5-year maturity, convertible into new CCT units. CCT also has an over-allotment option to raise an additional S$90m, with the agreement of the underwriter Standard Chartered Bank, thereby raising the total proceeds to S$370m. Proceeds from the bond issue would go to refinancing their short term debt, working capital and partial financing of asset enhancement works and new acquisitions including One George Street.
Cost of bonds at 3.95%. The convertible bonds will bear interest at 2% per annum whilst its yield to maturity would be at 3.95% per annum. Holders of these bonds may convert the bonds into units between 21 May 2008 and 21 April 2013 at a conversion price of S$2.6762, or 23.9% above CCT’s closing share price of S$2.16 on 1 April 2008. If there is no redemption, conversion or cancellation, the convertible bonds would be redeemed at 110.66% of their principal amount, or S$311m on 6 May 2013.
Comments
Impact of convertible bonds (CB) issue in dilution scenario. The quantum of this CB issue is relatively small, amounting to only 24% of the S$1.165bn purchase price for One George Street. At the S$2.6762 conversion price, there would be an increase of 104.6m shares. Potential marginal dilution impact is marginal, on assumption of full conversion. If converted, 2009 DPU is lowered by 1.4% to 14.2cts (from 14.4cts) while 2010 DPU is lowered by 1.9% to 15.2cts (from 15.5cts). Conversion in the short term to be rather unlikely for now given that the conversion price is at a 25% premium to closing price of S$2.14 on 2 April 2008. In CCT’s trading history, stock traded above the conversion price only during Jan-Sep 07, hitting a high of S$3.26 when expectations of office rental escalation was more bullish. With new stock of office supply increasingly entering the market from 2010 onwards, we take the view that market expectations are unlikely to return to 1H07 levels. However, with the tight office situation currently, the conversion of this instrument cannot be totally ruled out. Our target price for CCT would decline by 1.7% to S$2.85 after incorporating full dilution from the CB.
Marginal improvement in DPU estimates in no dilution scenario. Without any impact from the potential dilution, we project a marginal 0.7% improvement in 2009 DPU estimates to 14.5cts and 0.6% increase in 2010 DPU estimates to 15.6cts. Our raised DPU estimates come as a result of the lower cost of funding (3.95%) versus our higher estimate of cost of debt (4.5%) assumptions previously. We have assumed that there would be no dilution in this convertible bond issue but have included the amortisation of interest on the convertible bonds.
Valuation and recommendation
Impact of bonds issue marginal, Maintain Outperform, target price raised to S$2.91. We reiterate our Outperform recommendation on CCT with a marginally higher target price at S$2.91, up from S$2.90 (discount rate at 6.6%) based on DDMderived valuation. This is based on the assumption that there would be no conversion to units prior to maturity of the convertible bonds in 2013. At its current price of S$2.14, CCT offers an attractive total return of 41% including a potential price upside of 36% to our target price of S$2.91 and a dividend yield of 4.8%.