City Developments - Strong fundamentals this time round

Selective landbank acquisition strategy. Management mentioned that the current landbank of about 4.5m sqf (65% in the mass market to mid-tier segments and 35% in the high-end segment) is quite healthy and that it would acquire more land only if the price is right. It believes the reserve price of S$844psf ppr is high for the Laguna Park collective sale site. CDL was recently awarded the Chestnut Avenue site from the government reserve list for its top bid of S$280psf ppr, which makes it the fourth highest bidder out of 13 bids in total put in for the just-announced Dakota Residences site. Management noted good interest in two other sites (Yio Chu Kang Road and Serangoon Avenue 3 sites) that were triggered for launch from the Government Land Sales programme.

Upcoming projects. CDL will launch 396 units in the former Hong Leong Gardens site during the last week of this month with indicative average selling prices (ASP) of above S$900psf. Following this, it will launch 160 units at The Albany in 4Q09 with indicative ASPs of S$1,100-1,200psf. Management has been receiving inquiries from many foreign buyers for its high-end 228- unit The Quayside Isle project at Sentosa Cove and will be launching this in 1Q10 soon after the opening of the Sentosa integrated resort (IR) with indicative ASPs of S$1,800-2,200psf, depending on market conditions.

Strong fundamentals this time round. Management highlighted that the recovery in the residential segment is sustainable with buying interest filtering up from the mass market and mid-tier segments to the high-end segment compared with the top-down filtering seen during the previous property boom. It believes current demand is well supported by fundamentals, with pent-up demand, low interest rates, Asian growth story and turnaround in market sentiment acting as the key catalysts. It expects demand to remain strong for the rest of the year. It also added that speculation levels are not high enough at the moment for the government to take drastic measures.

Hotel occupancy levels expected to improve in 2H09. CDL said hotel occupancy levels have been picking up slowly after 2Q09, although advance booking for F1 games has been slightly disappointing. It expects demand to pick up as the event draws closer. Management expects hotel occupancy levels to firm up with marginal improvements in average daily rate (ADR) supported by the IR openings and other events like the APEC conference.

Positive rental reversion seen in commercial segment. Revenue and profits from the commercial segment increased 17% and 25% respectively due to positive rental reversions despite the steep fall in office rentals as passing rentals were still below spot rentals. The occupancy levels for its Grade A space are still above 90% and management expects occupancy levels to remain healthy for the current financial year.

Construction work for South Beach project to begin by 2010. CDL has completed its financing arrangement for its much-awaited South Beach project in June and is finalising its design. The project will comprise of 40% office space and 30% hotel space, and the remaining 30% will be white space with primarily residential developments. Management noted that construction costs have eased and expects to award the construction contract next year. There could be some write-downs booked towards the end of the year due to declines in the overall property value mostly in the office segment.

Easing financing concerns. Management noted that with the property market looking up, banks are more than willing to lend again. CDL is able to finance its loans at an attractive interest rate of 3.25%. The company’s net gearing came down to 0.46x in 2Q09 and has a healthy interest cover ratio of 10.1x.

We continue to see good value in CDL and maintain our BUY recommendation with a target price of S$12.70 pegged at a 15% premium to 2009 RNAV of S$11.04.

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CDL HOSPITALITY TRUST - A Satisfying Stay

We initiate coverage on CDL Hospitality Trust (CDL HT) with a BUY recommendation and fair value of $1.72. CDL HT currently owns hospitality related properties in Singapore and New Zealand. We believe the Trust is poised to benefit from the economic recovery coupled with the government efforts to boost the local tourism industry.

Tail-end of economic recession? Singapore technically exited the recession in 2Q09 with a q-q SAAR GDP of 20.7%. The official forecast from MTI is a contraction of 4% to 6% for 2009. That being said, the share price of CDL HT has re-rated from 0.3 times book value seen in March this year to approximately 1 times book value currently, on optimism of the recovering economy. We believe that CDL HT will continue to re-rate to its historical average of above 1.5 times book value seen during the economic boom of 2007 if the cards are lined up properly.

Tourism 2015. The Singapore government has set a target to achieve 17 million tourist arrivals and tourist revenue of $30 billion by 2015. Hospitality operators like CDL HT will stand to benefit from the government initiatives.

Healthy balance sheet. CDL HT has one of the lowest gearing among the S-REITs. We view this as prudence on management part in managing capital usage well. CDL HT has gearing of 19% and total debt of $287 million. We believe with the backing of a strong sponsor, it has better access to funding sources.
Strong sponsor, benefits aplenty. The sponsor of CDL HT is M&C Hotels plc which is majority owned by City Development Ltd. With a right of first refusal from the sponsor, there are ample acquisition opportunities for CDL HT to expand its portfolio. Furthermore, management has indicated that it has the expertise to operate its hotels if any of its lessees decides to terminate their leases.

Fortune Real Estate Investment Trust - Proceeding with acquisition and rights issue

FRT will proceed with acquisition and rights issue: All resolutions for the proposed acquisition of the three properties and one-for-one rights issue were duly passed at the EGM held on 11 September.

One-for-one rights issue at HK$2.29: Book closure date for rights entitlement is set at 17 September 5pm. The commencement of "nilpaid rights" trading period is yet to be determined but is expected to be no later than 23 Sept. (see Table 1 for indicative timetable).

Under-gearing still better than over-paying: The three new assets would be acquired at an average net yield of 5.1%, which looks fair. We believe this acquisition is much better than previous acquisitions done by other REITs where the sponsor sells assets at a high price into the REIT and uses a combination of financial engineering and aggressive gearing to initially maintain a high yield –it only delays the pain of overpaying for assets. Fortune REIT's proposed acquisition is simple and straightforward, though the gearing level might even be considered a bit too conservative, in our view. The blended yield post acquisition would be still be high at 7.5% for FY10E and 7.3% for FY11E. Theoretically, investors could gear up externally (and buy more of the REITs) to engineer a higher yield on equity, though it may not be a viable option in reality.

Maintain OW, Jun-10 PT HK$3.4: In our previous note dated 24 Aug 2009, we had already incorporated the contributions from new assets and also the dilution from the rights issue. Our Jun-10 NPV post acquisition and rights issue is HK$3.4/share. We maintain our ex-rights PT at HK$3.4/share, which is on par with the new NPV. Our price target is based on a discount rate of 6.57% and LT growth rate of 0.4%. Risks to our PT include higher than expected vacancy rates and prolonged economic recession.

City Developments - Management prudent in acquiring landbank.

New launches in 2H09. City Developments (CDL) will be launching 396 units at the former Hong Leong Gardens site (Hundred Trees condominium) in the last week of September at indicative average selling price (ASP) levels of above S$900psf. This will be followed by the launch of The Albany at indicative prices of S$1,100-1,200 psf. The much-awaited Quayside Isle project at Sentosa Cove is expected to be launched in 1Q10 in the price range of S$1,800-2,200 psf after the opening of the Sentosa integrated resort.

Management prudent in acquiring landbank. Management is comfortable with the current landbank of about 4.5m sqf and will acquire more land only if it feels the price is right. CDL is interested in the recent land releases from the government’s Reserve List and is the top bidder for the Chestnut Avenue site with a top bid of S$129.1m (S$280psf ppr), but feels that the reserve price of Laguna Park (S$844psf ppr) is quite high.

Construction work for South Beach to begin by 2010. CDL has completed financing arrangements for the South Beach project and is finalising the design. Construction work is expected to begin by 2010. Management expects to see some write-downs from the project in the current financial year mostly due to the decline in the value of office space.

Hotel occupancy likely to firm up. Advance room bookings in relation to Formula One races are rather disappointing. However, management expects occupancy levels to pick up as the event draws closer and to remain healthy in 2H09/2010 with other events like the APEC conference, opening of the integrated resorts and the Youth Olympic Games.

Maintain BUY; target price raised to S$13.50. We continue to see good value in CDL and maintain our BUY recommendation with a revised target price of S$13.50 pegged at a 15% premium to our 2009 revised RNAV of S$11.73.

Frasers Centrepoint: Poised for major league debut; upgrade to BUY

Physical integration a success. We visited Fraser Centrepoint Trust's Northpoint mall (NP) to assess the success of the S$38.6m asset works. The goal was two-fold: transfer GFA from the fourth level to higher yielding lower levels; and fully integrate the asset with new extension Northpoint 2 (NP2) to create one seamless retail mall. The physical integration has been very successful, in our opinion. It is very hard to identify where NP ends and NP2 begins. The transition out of AEI is still taking place on upper levels as some tenants are still in the process of fitting-out.

But trust-level integration incomplete. We have commented on the lack of scale in FCT's portfolio before and this is the most obvious opportunity: in essence, FCT owns only two-thirds of a prime asset. Despite a strong pipeline, FCT's acquisition plans were put on hold when the credit crunch struck. Sponsor FNN [NOT RATED] continues to hold on to NP2 (85,500 sf). We believe that an acquisition is likely in the next six months as: 1) credit markets have stabilized; 2) FCT has re-rated strongly making an accretive acquisition more feasible; and 3) the market may prefer an acquisition to support another potentially cash-flow disruptive AEI project (now at Causeway Point). The put and call option agreement with FNN indicates a price range of S$139.5m to S$170.5m for NP2. We currently assume the buy is priced per the Sep-08 valuation of NP, at around S$1916 psf or S$164m. Note that YewTee Point (YT, 72,000 sf) is also "ready for acquisition". If priced similarly, total acquisition cost is roughly S$302m.

Poised for major league debut. We have lowered our cost of equity assumption, changed our rent reversion assumptions from -5% and -7% inFY10-11 to 0% per year, and rolled over to FY10 (year end is 30 Sep). We also incorporate the NP2 and YT acquisitions at S$302m, with 70% of the cost funded via fresh equity at a 40% discount to the current price. This takes our fair value estimate from S$0.95 (at par to prior SOTP) to S$1.22.

We turn positive on FCT as 1) acquisitions will create scale, enhancing FCT's attractiveness for institutional investors (thus benefiting retail holders); and 2) the yield gap between FCT and CapitaMall Trust [HOLD; FV: S$1.53] is fairly wide even after allowing for a size and asset premium. Upgrade to BUY (16% total return). Our ideal entry point would be at any capital raising / acquisition announcement.

City Developments - Beware when government steps in

We have downgraded our rating for City Developments (CDL) to 4 (Underperform) from 3 (Hold) after the government announced, on 14 September, measures to ensure a ‘stable and sustainable’ property market, including a surprise (in our view) withdrawal of the interest absorption scheme (IAS).

We expect the shares of CDL, one of the biggest developers with a significant portion of its earnings and NAV exposed to the Singapore residential market, to be adversely affected.

We believe the environment is not conducive to owning property-developer shares, with the government set on pumping more land available for development from 1H10 and unlikely to reinstate, if ever again, the IAS until at least the next propertymarket bottom.

We have raised our six-month target price, based on a sum-ofthe- parts (SOTP) valuation, to S$9.52 from S$9.26 due to the increase in market value of its listed hotel operations. We have not changed our earnings forecasts because we do not expect CDL’s immediate pipeline of project launches to be hit badly.

Bukit Sembawang Estates - Your Key To Buried Treasure

Purest Play on S’pore Residential. Bukit Sembawang (“BS”) offers the purest play on the Singapore residential market, with nearly 100% of its RNAV attributed to this sub-sector. It has been associated with the development of landed housing in Singapore since the 1950s.

Low-Cost Legacy Land. BS holds 4.2mil sqft of landbank in Singapore, which places it second among listed developers. About 74% of this is low-cost legacy land from its days in the rubber plantation business, resulting in EBIT margins of 36% to 53%, which is higher than the usual 15- 20% EBIT margin associated with mass-market properties.

This legacy land is zoned for landed housing, a subsegment of the residential market that has demonstrated greater resilience in the recent cycle. An increased scarcity of landed sites bodes well for future pricing power and unlocking of value. In 2005-06, BS diversified into the nonlanded segment, acquiring c.1.4mil sqft of GFA in the mid and high-end segments, enabling it to tap into a recovery in these segments filtering up from the mass-market.

Initiate Coverage with a BUY, TP S$6.02. TP is based on a 30% discount to RNAV of S$8.60, to account for its low liquidity and expectation of a more gradual monetisation of its landbank. The stock is currently trading at 0.5x P/RNAV, the lowest in the sector, presenting undemanding valuations for value investors with a longer-term view.

Singapore Property - Buy into weakness on government measures

Buy into weakness on government measures, reiterate OVERWEIGHT. The Government’s reinstatement of the 1H10 Confirmed List and removal of IAS reflect its concerns over excessive speculation. However, we believe demand for mass projects remains sustainable, given that majority of buyers here are genuine home-occupiers and HDB prices continue to rise amid increased demand from Singaporeans and PRs. While we are cautious of the Government’s mindful watch, we see the kneejerk selldown (-4.4%) as a good opportunity to buy into property stocks. Our big-cap and mid-cap top picks within the OVERWEIGHT property sector remain CityDev and Wing Tai respectively.

1H10 GLS Confirmed List reinstated and IAS removed. To ensure a stable property market and prevent excessive speculation, the Government will (1) reinstate the Confirmed List for the 1H10 GLS Programme, (2) remove with immediate effect the Interest Absorption Scheme (IAS) and Interest Only Housing Loans and (3) end the Jan 09 Budget assistance measures for the property market upon their expiry in Jan 10 - 11. Aside from revealing the number of Confirmed List’s sites towards end-2009, the Government will increase the number of Reserve List’s sites from the current 16. IAS will still be allowed for projects where units have already been offered for sale under the IAS prior to the announcement. We think existing projects with IAS could see increased demand from buyers who remain comfortable with paying only 20% of sale price prior to TOP.

Not unexpected. Both measures (1) and (2) are in line with what Minister Mah previously suggested during the Jul – Aug 09, while we reckon measure (3) is comparatively less forceful. We also gather from recent showflat visits and talks with developers/agents that over the past few months more buyers opted for Normal Progressive Scheme over IAS given a 3 – 5% lower S$psf (where impact increases with size) and improved sentiments. Out of 10 buyers, 2 – 4 would choose IAS presently (vis-à-vis 6 – 8 previously). We expect measure (2) to drive out pure speculators with the sole intention of buying properties to sell within 2-3 years. This announcement and weakness within regional bourses should trigger a kneejerk sell-off of property stocks. But, we continue to see value in property counters given the upcoming IRs, improved macroeconomic signs, low interest rates and prime-luxury prices remaining 15 – 25% off 4Q07 peaks.

Hints of a sustainable mass-market demand. While the Government could have brought in the Confirmed List immediately and introduced more forceful measures to calm the current buying frenzy, we believe this could run counter to its overall cautious tone on the economy. Further, we view the Government’s measures as an indication that demand for mass projects is sustainable, especially when HDB prices continue to rise amid increased demand from locals and PRs. Without a healthy supply of mass-market sites, a subsequent hike in mass prices from current levels could further widen the gap between mass projects and HDB flats, thus delaying the Government’s vision of encouraging higher ownership of private homes.

Frasers Commercial Trust - Value amid recapitalisation

While Jones Lang La Salle estimates that Singapore capital values to June 2009 have fallen 37.9% since the market peak in 4Q07, the office market appears to be exhibiting signs of life in recent weeks. K-REIT Asia on 1 September announced the acquisition of six floors (20/F-25/F) office property Prudential Tower (leasehold with about 85 years remaining and total strata area of 248,541 sq ft) along Cecil Street in the CBD area from APF Property Investments for S$106.3mn or S$1,579psf of NLA.. The vendor will provide income support to K-REIT, capped at an aggregate S$5mn, for five years upon the completion of the acquisition to guarantee a NPI yield of 5.2% (S$5.5mn a year) over the five-year period. The transaction is the first significant deal in the Singapore CBD area since the reported sales in May 2009 of Anson House for a reported S$85mn (equivalent to S$1,100/psf) and Parakou Building for S$81.4mn (equivalent to S$1,280/psf). In addition to asset divestments/acquisitions, it has been reported (The Edge, 31 August 2009) that Servicorp would lease an entire floor (22,000sf) in Marina Bay Financial Centre Tower II with a seven-year lease commencing in 2010.

The recent 2Q09 GDP report for Australia revealed that business investment contraction was briefer and much smaller than expected by our economics team and that consumer spending was holding up much better than previously forecast. As a consequence of the better-than-anticipated 2Q09 GDP number, Nomura’s economics team has lifted Australia’s 2009 GDP growth forecast to 1.0% from -0.2%. Nomura’s economists have also adjusted its 2010F growth forecast to 1.9% from 1.8%, while maintaining its 3.0% forecast for 2011F. Key drivers to the revised forecasts are an expected stronger contribution from domestic demand and less support from net exports. With the better economic outlook, Nomura’s economists have revised peak unemployment forecast to 6.8% in 2010F (from 8.1% previously).

While the economic outlook appears to be improving, the 2Q office data highlight a marked contraction in demand in the Australian office market resulting in a broad uplift in office vacancy. According to the Property Council Australia, net demand contracted by 160,284sm, resulting in vacancy rising in the first six months of 2009 to 8.3% from 5.9% as at the end of 2008. Vacancy in Australia’s main CBD market rose to 7.3% by end-June from 4.7% at end-2008. While demand in the respective office markets remained weak, the rising in vacancy was partly prompted by the completion of nearly half a million square metres nationwide.

FCOT in August 2009 raised S$213.9mn via the issuance of 2,252.0 mn new rights units at S$0.095/units. In addition to the issuance of new equity, FCOT has acquired a 99-year leasehold interest in Alexandra Technopark from parent Frasers and Neave for S$342.5mn, funded by way of the issuance of preferred equity. A five-year master lease, as part of the deal, will ensure a net rental of S$22.0mn, equating to a net yield on our numbers of 6.4%. The preferred equity attracts a coupon of 5.5%, equivalent to S$18.8mn per annum. A full conversion of the preferred equity at a conversion price of S$0.177/unit would result in the issuance of further 1,933.0mn units. Following the transaction, the REIT manager estimated that its gearing would fall to 0.465x post the rights issue, falling to 0.385x following the acquisition of Alexander Technopark. On our numbers, we are forecasting end-FY09 gearing to come in at 0.41x vs our previous estimate (pre transaction) of 0.62x. FCOT in its circular indicated that its NAV would fall to S$0.26/unit, following the rights issue from S$0.78/unit based on its 1Q09 results. If the preference shares were fully converted the NAV would fall to S$0.23/unit.

While signs of life are appearing in the Singapore office market, tough market conditions remain in both the Singapore and Australian office markets. That said, we continue to see value in FCOT, with market conditions more than reflected in our asset valuations. Following its recent recapitalisation, we reset our price target to S$0.184/unit (down from S$0.29/unit) to reflect the increased number of shares, as a consequence of the S$213.9mn rights issue and the potential dilutive effects of conversion of preferred equity. Following the rights issue as well as the acquisition of Alexander Technopark on a yield of 6.4%, we raise our distributable income to S$26.2mn for FY09F (from S$22.8mn) and to S$44.6mn for FY10F (from S$18.4mn). While distributable income has been raised, our DPU for FY09F and FY10F are cut to S¢1.8 and S¢1.5, respectively (due to the rights and preferred equity issuance) resulting in a prospective FY09F and FY10F yield of 11.0% and 9.2%, respectively.We retain our BUY recommendation on FCOT.

CapitaLand - Introducing The Interlace

CapitaLand unveiled designs for The Interlace last Friday, its latest project to be developed on the former Gillman Heights. Designed by Ole Scheeren from The Office of Metropolitan Architecture (OMA), The Interlace has an avant-garde design and will comprise 1,040 units on a site of 871,884 sq ft. CapitaLand has a 60%-stake in the project.

The Interlace is scheduled to be launched in October, and the management has stressed repeatedly that pricing would be affordable. Its construction costs are expected to be between $250-270 psf, lower than the $320 psf we had assumed earlier. We correspondingly lower our estimated breakeven price to $703 psf, while keeping our ASP unchanged at $900 psf.

For The Interlace, a $660m 5-year project financing loan has been secured from seven banks (DBS, UOB, StanChart, OCBC, Bank of Tokyo Mitsubishi UFJ, Maybank and HSBC). We estimate the all-in borrowing cost to be about 4.2%.

Besides The Interlace, CapitaLand is also preparing to launch the 165-unit Urban Suites, on the site of the former Char Yong Gardens. We reckon that its launch is closer to the year’s end. Lowering our cost of construction assumption by 10% to $360 psf, the estimated post-provisioning breakeven cost for the project is $1,925 psf. We maintain our ASP assumption at $2,300 psf.

We have lowered our construction costs assumptions for the other projects in CapitaLand’s landbank, and pegged the associated companies to market value. Pegged at a 15%-premium to our FY10 RNAV of $3.98, we have raised our target price to $4.57. The stock has been a relative laggard compared to its peers. Upgrading to BUY.

Ho Bee Investment - 1H09: Balanced sheet strengthened despite huge write-downs

Well positioned to reap the benefits of the upcoming integrated resorts in Sentosa and improved homebuyer sentiment in the high-end segment. Maintain BUY with a target price of S$1.65.

Ho Bee reported 2Q09 PATMI of S$157.3m (+325% yoy), bringing 1H09 net profit to S$194.6m, up 208.6% yoy. The results include S$109.8m in land write-downs and revaluation losses. The results are way above our and consensus’ expectations due to earlier-than-expected completion and profit recognition mainly from The Coast and Paradise Island projects that obtained TOP in Apr-May 09. Revenue from the property investment segment improved in 2Q09 to S$4.6m (+12% yoy) due to an increase in rental income from the Group’s industrial and retail spaces. Hotel revenues continued to decline in 2Q09 to S$1.1m (-50%yoy) due to the drop in tourist arrivals. The Group announced an interim dividend declaration of 2 cents per ordinary share.

Gearing down to comfortable levels despite huge asset write-downs. Ho Bee’s gearing dropped from 1.26x to 0.51x due to the repayment of borrowings from the strong collections of proceeds from The Coast and Paradise Island. This is despite booking S$109.8m in land write-downs and revaluation losses. The asset write-downs relate to a S$53.9m land write-down for the Pinnacle site, S$25.4m mostly from the Elmira Heights site and S$30.4m in revaluation losses mainly from Samsung Hub.

Riding on improved homebuyer sentiment in mid-tier to high-end segments. Ho Bee is a key beneficiary of the return of homebuyer interest in the mid-tier to high-end segments as it derives nearly 87% of its value from these segments. The Group also sold more than 20% additional units each at The Orange Grove and Dakota Residences projects at S$2,200psf and S$870 psf respectively. Riding on the improved sentiment, it is likely to launch Trilight and Parvis in 4Q09.

Key beneficiary of expected demand driven by upcoming IR on Sentosa. Ho Bee is the biggest Sentosa developer with a landbank of 2.5m sf of GFA and has been reaping rich rewards as the pioneer developer there. The opening of Resorts World@Sentosa in 1Q10 could act as a catalyst in boosting price levels at the land-scarce Sentosa Cove enclave, which bodes well for Ho Bee. It has yet to relaunch the Turqoise@Sentosa Cove project and launch the Seascape and Pinnacle Collection projects.

Ho Bee is well positioned to take advantage of the recent resurgence in buying interest in the mid-tier to high-end segments as it derives over 87% of its value from these segments. We maintain our BUY recommendation with a target price of S$1.65 pegged at parity to 2009 NAV.

Parkway Life REIT - Expanding funding base

The first S-REIT to diversify its sources of funding through Islamic finance. Parkway Life’s low gearing enables it to grow via acquisitions. Reiterate BUY with a target price of S$1.65.

Diversifying sources of funding by tapping Islamic finance. Parkway Life REIT was offered a S$50m three-year Islamic revolving credit facility by The Islamic Bank of Asia, a subsidiary of DBS Group Holdings. Parkway Life is recognised as Shariah-compliant based on preliminary review. Islamic finance provides financial flexibility as Parkway Life can now tap funding from traditional commercial banks and diversification from Islamic banking facilities. Funding provided by Islamic finance is usually at a lower cost compared with traditional sources from commercial banks. The Islamic revolving credit facility was priced at an attractive spread of 195bp.

Parkway Life’s current gearing of 22.7% and all-in cost of borrowings of 2.89% is among the lowest in the S-REIT sector. Its interest cover ratio is a healthy 6.9x. It has debt headroom of S$308.3m for acquisitions before reaching gearing of 40%. Parkway Life has established a S$500m multicurrency medium term note (MTN) programme, which is currently untapped.

Embarking on maiden AEI. Parkway Life has completed asset enhancement initiatives (AEI) for PLife Matsudo, a pharmaceutical production and distribution facility in Matsudo City, Chiba prefecture, by converting existing utility space into a device manufacturing room. The enhancement work costs S$2.6m and increases gross rent by 19.4% with effect from Jul 09. The modification to the facility is customised to sub-lessee Inverness Medical’s operational requirements.

Hedging against inflation. The minimum rent payable from Singapore hospitals, Mount Elizabeth Hospital, Gleneagles Hospital and East Shore Hospital, is set at CPI + 1% above rents paid in the preceding year. CPI for First Year was 5.25%, thus minimum increase in rents for Second Year (23 Aug 08 to 22 Aug 09) was set at 6.25%. CPI for Second Year was 3.36%, thus minimum increase in rents for Third Year (23 Aug 09 to 22 Aug 10) would be set at 4.36%. The downside protection ensures that rents from Singapore hospitals, which accounted for 78.3% of group revenue in 2Q09, will always be increasing.

Parkway Life has strong defensive qualities due to the long-term leases for healthcare assets. Its low gearing enables it to grow via acquisitions. We have raised 2010 DPU forecast by 2.6% to 8.0 cents due to AEI for the PLife Matsudo facility and growth from Singapore hospitals.

City Development - Fully valued

City Dev reported 2Q09 net profit of S$140.0m, 14.7 S cents EPS, ahead of our S$85m estimate. We raise our target price to S$8.37 (S$8.25 previously), accounting for presales at recent launches as well as planned launches in 2H09. Its share price has risen 24% in the past month, and is trading at a 6% premium to our RNAV of S$9.30. Maintain Underperform.

The key variances were higher operating profit from the faster pace of profit recognition of residential projects (S$21m – some profit from The Arte was recognised this quarter), lower finance cost (S$17.3m), as well as lower tax (S$6.6m) and minority interests (S$10.5m). Residential development contributed 60% to earnings, whilst the 15% contribution from rental properties was slightly ahead of hotel earnings contribution, reflecting weak operating conditions. Net gearing was slightly lower at 46% on healthy interest cover of 10.1x. Adjusting for fair value gains on its investment properties, its gearing ratio would fall to ~35%.

Millennium and Copthorne (M&C) reported 2Q09 headline net profit of £16.4m, up from the £9m in 1Q09 reflecting strong cost initiatives in the face of flat hotel revenue. Overall occupancy rate was 67.6% versus 73.3% in 2Q08 with average room rate of £78.40 versus £79.38 over the same period last year. RevPAR as a result slipped 9% YoY to £53. RevPAR in July remains weak at an 18.3% YoY contraction, although signs of improvement are seen in Singapore and New York. We have already factored in a stronger 2H09 in our estimates.

The group plans to launch several projects in 2H09, including Hong Leong Gardens condo (396 units), the former Albany/Thomson Mansion sites (160 units) and possibly The Quayside Isle at Sentosa Cove, suggesting management is more positive than a quarter ago.

FY09 and FY10 EPS raised by 12% and 14%, respectively, updating for 1H09 results and presales at recent launches. We raise our target price to S$8.37, based on unchanged 10% discount to RNAV of S$9.30. The shares are factoring in more than 20% rise in residential prices over the next 12 months. It is fully valued, in our view, as the stock is trading at a 6% premium over our RNAV of S$9.30.

CapitaLand - The new-design launch of the former Gillman heights

CapitaLand’s much awaited project launch of The Interlace (former Gillman Heights) in October is expected to receive a warm response and further boost the sales volume in the already buoyant residential segment.

We recently attended the design launch of The Interlace. Located at Alexandra Road/Depot Road, it is one of the largest and much awaited residential developments jointly developed by CapitaLand and Hotel Properties. The design presentation was followed by a media/analysts Q&A session.

Unique architecture. The Interlace has 1,040 units designed by world renowned architect Ole Scheeren, Partner of the Office for Metropolitan Architecture (OMA). The design breaks away from the traditional normal cluster of vertically stacked tower residential apartments into a stacked interlocking hexagonal arrangement comprising 31 apartment blocks with an expansive and interconnected network of communal spaces. The project aims to present a radically new approach to contemporary living in a tropical environment.

Project ASP could set new benchmark levels. The 81,000sqm site was acquired at S$548m or S$363psfppr. Management estimates construction cost at S$250-270psf which works out to a breakeven cost of around S$750psf. We expect average ASP levels of around S$1,000psf, a new benchmark in the area considering the highest resale prices of S$517psf and S$817 psf for Gillman Heights (former site) and Normanton Park (closest comparable) respectively. The average ASPs of some of other comparable projects cited by management in nearby locations are S$900-1100 psf at One North Residences, S$900-1000psf at Rochester, S$800-1,400 psf at Caribbean and S$1,500-1,700psf at Reflections at Keppel Bay.

The sale of the 1,040-unit project could well boost the transaction volumes in the already buoyant mass- and mid-tier segments and set new price levels for future projects. We estimate that the project could bring in S$262.5m in pretax profits or 5.8 cents a share in pretax profits. We expect strong demand for this project considering the attractiveness of the location and recent buying interest.

Project financing completed. The total development cost for the project is around S$1.4b and CapitaLand has made arrangements for a 5-year S$660m project financing from seven leading bankers at an attractive interest rate of 3.48%. Management said construction for the project would begin soon and is close to awarding its construction contract work to local construction and building group.

Ascendas REIT - Large scale is the winning formula

Started in 2002 with just eight properties, A-REIT has successfully enlarged its property portfolio across five sub-sectors: Business & Science Parks, High-Tech industrial, Light Industrial, Logistics & Distribution and Warehouse Retail facilities. 47% of its portfolio has built-in rental escalation clauses. These properties enjoy above-sector average occupancy rate of 97.1%.

Acquisitions have underpinned A-REIT’s dividend growth. Its development capability provides an additional boost. Completion of development projects over the next 12 months will continue to contribute positively to income. Growth could also come from acquisitions of its sponsor’s Singapore assets (S$1.1b) and ample industrial properties in Singapore.

A-REIT has completed two rounds of cash calls this calendar year, raising a total of about S$700m. The proceeds have been deployed towards reducing debt and funding its existing developments. Its gearing has been reduced to 29.3% as of Aug-09. This clears any possible overhang on refinancing issues and frees up its capital for future growth.

REIT’s strong sponsor, balance sheet strength, resilient portfolio and growth potential underscore its P/B ratio of 1.05x. We find its share price underperformance hard to justify. We initiate with a Buy.

City Development - Respectable set of results; solid sales record

2Q09 results exceeded our forecasts on stronger devt profit recognition. CDL is one of the main beneficiaries of the domestic housing market recovery, adding more than S$1.3bn in sales YTD to already significant pre-sales. Sound balance sheet with diversified sources of capital provides flexibility for acquisitions. However, the positives are fairly priced at a 9% premium to RNAV. Hold.
Lower devt profits (-19% YoY, accounting for 60% of PBT) and hotel earnings (- 60% YoY) contributed to the YoY earnings decline. The Arte started to contribute in 2Q09 alongside high margined projects pre-sold in 2006/7. CDL has sold 1,031 units YTD amounting to sales value of S$1.34bn, including Volari and The Gale which are both >90% sold.

Revising up FY09-11 earnings by 9% on higher price and better pre-sales YTD 2H earnings should be stronger, underpinned by a seasonally stronger 2H for hotels, progressive development profit recognition and steady rental income. Mgmt plans to launch a further 400 units in 2H including the Hong Leong Gardens, Albany/Thomson projects and Quayside Isle. These targets are conservative.

Maintain Hold; TP revised to S$9.20 (fr S$8.40) pegged to parity to RNAV We revise our RNAV from S$8.40 to S$9.20 to reflect the re-rating of M&C, higher ASP and take-up rates. TP is pegged to parity to RNAV, on par with previous recovery years. Although we like CDL’s Singapore residential exposure, especially in the mass to mid segment, we think the stock is fairly valued at 9% premium to RNAV. Downside risks: reversal of economic trends, weaker than expected leasing demand; upside risks: stronger than expected property market recovery.

CapitaLand - Ready for asset acquisition

CapitaLand has allocated S$1bn to increase the capital base of its China, Vietnam, and Ascott businesses. This is positive and signals management’s appetite to take on risk. We believe asset acquisition could happen within 3-5 months and is a price catalyst. We think CapitaLand would remain residential-focused and would buy sites in Shanghai, Beijing, and Ho Chi Minh City.

We think CapitaLand’s issuance of S$1.2bn convertible bonds is a cost-efficient way of refinancing and securing long-term capital ahead of an acquisition. The debt maturity duration is now over 6 year from 4.4 as of December 2008. CapitaLand’s share price has lagged its Hong Kong peers by up to 20%. We thinkthere is scope for the performance gap to narrow as the company commences its capital deployment.

CapitaLand reported an H109 loss of S$114.1m due to net revaluation losses. Excluding one-offs, core Q209 PATMI was S$124m (+163% QoQ) on the back of contributions from China and Singapore residential property.

We include the non-cash revaluation losses into our model and reduce 2009E headline EPS by 60% to 5cts (from 13cts) with normalised EPS of 13cts. We increase our RNAV estimate to S$4.35 (from S$4.25) due to a 15% increase in expected launch prices for Singapore projects (in line with our residential forecast upgrade), mark-to-market listed REITs, and update our earnings forecast for Australand.

Stamford Land - Currency turning favorable

We can see that Australia Dollars (A$) plunged nearly 22% against Singapore Dollars (S$) from Jul ? Dec 2008. The sharp decline of A $ during this period resulted in huge translation losses for Stamford Land's FY09 result. Weaknesses in A$ prolonged and extended till around Mar 2009, when global economy was believed to have bottomed. Since Mar 2009, A$ managed to gain strength and recovered nearly 14% against S $. Current spot rate stands at about S$1.20/A$.

The recent 1Q10 results of Stamford Land clearly portrayed the positive impact of stronger A$ to its financials. Foreign currency translation reserve increased from a negative S$16.7m to a positive S$18.6m. The improvement inevitably lifted Stamford Land's total equity value.

Taking Bloomberg's year 2010 consensus forecast of S$1.19/A$ by various international lenders into account, we believe that current strength of A$ can be sustained and valuation of Stamford Land can have room to improve.

In consideration of future sustainable strength of A$ against S$, we imply a 10% appreciation of A$ into FY10E, and a further 5% for FY11E. On top of that, we also reduced the capitalization rate of Stamford Land's hotel properties from 6.5% to 6.0% to be more inline with the gradual property market recovery in Australia. Our target price has thus been increased to S$0.48 and we upgrade Stamford Land to BUY.

Allgreen Properties: Geared To Go

All Ready To Go. We met Allgreen management recently and came away assured that it remains in a good position to take advantage of current momentum in the mid-tier segment, given its enviable number of launch-ready projects. Net gearing remains low at 0.46x and management indicated it would be comfortable gearing up to 0.65x. Based on its 2Q09 balance sheet, it provides debt headroom of c. S$500m for any potential acquisitions. Its participation in the Chestnut Ave tender shows it is not averse to supplementing its landbank.

Visibility Improving. While FY09F earnings from its development properties segment will largely be underpinned by revenue recognition from Cairnhill Residences (TOP end-09), Cascadia and Pavilion Park, recent success at One Devonshire and VIVA will provide earnings visibility going into FY10F and FY11F. Potential launches in the pipeline will also contribute, as will its share from JV projects in China, which we believe could boost earnings from late FY10 onwards.

BUY, TP S$1.39. With four launch-ready projects in various locations, we believe Allgreen is poised to capitalise on buoyant sentiment in the mid-tier segment and realize its fair value. Any success in subsequent mass-market land tenders will likely be RNAV-accretive and provide a further catalyst for the stock. Allgreen remains our top mid-cap pick, with a TP of S$1.39.

Hotel Prop: There are better places to stay

Still Hurting. The global economic downturn and the H1N1 scare continued to draw blood from hospitality play HPL, as it reported a 72% yoy drop in 2Q09 PATMI to S$4.4m, as revenue slid 27% to S$103m. Lower contribution from property development did not help things, as start-up losses from its associates (like interest expense at Farrer Court) further hurt its bottomline.

Highly Geared. Despite its exposure to the cashflow-generative hospitality sector, operating cashflow stayed weak at S$15m, which did little to change its net debt position of S$1.3bn. Gearing remains high at 1.0x.

Not Best Play on IR Story. Its hotel portfolio comprises properties in Singapore as well as overseas. Even as we input a 25% increase in RevPAR for 2010 and roll over to FY10 valuations, Singapore hotels only contribute c.25% of FY10 earnings and 33% of RNAV.

Maintain HOLD, TP S$2.05. Our RNAV is raised to S$2.56 (from S$2.13) and we narrow our RNAV discount to 20% in anticipation of a turnaround in the global hospitality industry. With a TP of S$2.05, stock looks expensive at current levels and we prefer CDL HT (TP S$1.36), Genting S’pore (TP S$0.98) and UOL (TP S$3.86) as plays on the IR story.

SC Global Developments

2Q FY2009 results. SC Global reported 2Q FY2009 revenue of S$226.4m (+599% yoy) and net profit of S$7.8m (-32% yoy). As SC Global’s stake in AVJennings Ltd increased to 50.03% in December 2008, the revenue of AVJennings Ltd had been consolidated as a subsidiary. This caused a significant increase in SC Global’s revenue. However, as AVJennings Ltd’s property business were mainly high volumes with lower margins, the net profit of SC Global was lower.

Earnings estimates for FY2009F to FY2011F. SC Global’s profit is expected to increase from S$34.0m in FY2009F to S$193.1m and S$195.8m in FY2010F and FY2011F respectively. This is because most of its residential projects are anticipated to be completed in FY2010F and FY2011F.

Outlook for FY2009F. SC Global highlights the recent strength in the Singapore residential property market. We expect it to launch properties for sale only next year when sentiment in the luxury market improves further. On the Australian market, it mentions that AVJennings Ltd continues to face market pressures and challenges.

Maintain HOLD recommendation, fair value raised from S$1.10 to S$1.52. Like other property stocks, SC Global’s share price has risen sharply in the recent rally. We are maintaining our hold recommendation as we feel that there is limited upside from its current share price. Nevertheless, as the sales momentum in the Singapore property market is expected to be strong, we are raising the fair value from S$1.10 to S$1.52. This is a change from 50% to 40% discount to the RNAV. The RNAV has also been raised from S$2.21 to S$2.53 due to the higher than expected increase in property prices.