CRCT - An uninspiring 2Q09 result

CRCT reported 2Q09 distribution income of S$12m, 1.94 S cents DPU; +14.2% YoY, -9.7% QoQ. Including S$0.8m retained for payout later in the year, distribution income was S$12.8m, S$2m ahead of our estimates. We maintain Underperform with a slightly higher target price of S$0.48.

2Q09 NPI slightly below estimates: Net property income was S$19.4m, S$1.4m or 6.7% below our estimates, due to higher-than-expected property expenses. The distribution income was ahead of our estimates as interest expense was S$3.3m lower, due to interest savings from the cross-currency interest rate swap in respect of its S$88m 2-year term loan facility.

Leasing conditions challenging, rent reversions flat: Portfolio occupancy dipped 1.0ppt QoQ to 95.7%. Challenging leasing conditions in Beijing led to lower occupancy at Xizhimen Mall (-0.3ppt to 95.4%) and Wangjing Mall (-1ppt to 98.8%). Saihan Mall’s occupancy (-10.5% ppt QoQ to 86.2%) was impacted by extensive asset enhancement activity, which would be completed by end 2009. In balancing rentals and maintaining occupancy, rent reversions were flat at -0.3% over preceding rentals. Xizhimen Mall registered negative reversions of 6.5% but this was mitigated by Xinwu Mall’s strongly positive 38.9% reversions.

Mild decline in property valuations, gearing stable: The mid-year portfolio revaluation saw a 4.6% (or S$57m) decline in property values from the December 2008 valuation of S$1.25bn. In Rmb terms, the valuation was marginally lower by 0.9%. Gearing was stable at 33.6% with a healthy interest cover of 7.3x and an average cost of debt of 2.3%.

Acquisitions now possible but still challenging: Share price action over the past 3 months lowered CRCT’s trading yield from more than 10% to 7%, making accretive acquisitions a possibility. However, the lack of third-party assets at reasonable prices could mean CRCT might have to wait on potential dispositions from CapitaLand’s private equity funds, which may not happen in the near term, as most of the malls are greenfield and require time to stabilise. Earnings and target price revision

We raise our DPU forecast for FY09 by 6% and for FY10 by 8%, factoring in interest savings from the cross-currency interest rate swap in respect of its S$88m 2-year term loan facility. We thus lift our target price slightly to S$0.48 from S$0.45.

12-month price target: S$0.48 based on a DCF methodology. Maintain Underperform. We prefer SREITs with higher yields, such as AREIT (9.0% yield; AREIT SP, S$1.68, OP, TP: S$1.85, upside: 10%) and CapitaCommercial Trust (7.9% yield; CCT SP, S$0.89, OP, TP: S$1.08, upside: 21%).

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CapitaRetail China Trust - Only a matter of time

CapitaRetail China Trust (CRCT) announced its 2Q FY09 results on 23 July. The distribution-per-unit (DPU) of 1.94¢ for the quarter (up 13.9% YoY) was 2.4% above our estimate.

On the possibility of acquisitions, CEO Wee Hui Kan told us that his team monitored the market constantly. He gave us no firm indication of an acquisition, but said that after the recent unit-price recovery, acquisitions would certainly be more feasible now (compared with six months ago). The management also noted that the credit markets (onshore and offshore) had improved.

2Q FY09 net-property income (NPI) was 1% below our estimate, due almost entirely to the depreciation of the Renminbi against the Singapore dollar (compared with 1Q FY09). A much lower-than-expected finance cost was the positive swing factor for the bottom-line, as the average cost of debt declined to 2.3% from 2.9% for 1Q FY09.

Our six-month target-price, based on our RNG valuation method, of S$1.32, is unchanged. We have revised down our core-operating distribution forecast for FY10, and have adjusted down our (long-term) cost-of-debt assumption to 4.2% (from 4.5%). The target-price to June 2009 NAV (of S$1.16) would be 1.14x.

We have revised down our DPU forecasts by 2.7% for FY09, 2.9% for FY10, and 2.5% for FY11, after fine-tuning our NPI forecasts for each of the assets.

We maintain our 2 (Outperform) rating, and believe a DPU-accretive acquisition announcement (within the next six months) would trigger unit-price outperformance, especially if the equity and credit markets continue their recovery in 2H09.

CapitaRetail China Trust - Pricing in China growth premium

2Q09 results slightly below expectation due to currency translation, DPU of S$0.0194/unit. Stock will trade ex-1H09 DPU of S$0.0408 on 8th Sept. Net property income held up (+2% Q/Q) during the quarter in RMB terms despite negative rental reversions in Beijing. Management has guided for a stable 2H09 and we have revised down our estimates for FY09/10 by 2% to reflect a stronger S$ against RMB outlook.

Acquisition is now viable, but not the immediate focus. With the recent rally in the share price, we believe yield accretive acquisition is viable for the trust again now with WACC at 6.2% on our estimates versus physical asset yield averaging 7%. However, given the 2 major AEIs coming onstream in 2H09 and the still challenging operating environment in some of the key retail markets, we believe management would focus more on ensuring organic growth in the near term. That said, a further re-rating of the stock price would push CRCT into a virtuous cycle, in which accretion from acquisition could be more attractive, in our view.

Stock to price in China growth premium, introduction of China REIT code the key catalyst. We have raised our Jun-10 price target to S$1.30/unit as we price in a higher growth expectation. The increase in price target is a result of our lower discount rate, higher LT growth rate and rolling forward our time frame. Key catalyst for the stock would be the introduction of China REIT code and the potential listing of the first China REIT expected in 4Q09 / 1Q10, which is likely to be at a premium valuation to CRCT, in our view.

We remain OW on CRCT, but remove the stock from Analyst Focus List as CRCT has outperformed YTD by 74%. Key risks to our rating and price target include a worse than expected rental reversion cycle or a delay in the introduction of China REIT which is expected in 4Q09/1Q10.

CapitaRetail China Trust - Almost ready to acquire

We have upgraded our rating for CRCT to 2 (Outperform) from 4 (Underperform) and expect a resumption of acquisitions from CapitaLand’s China-mall pipeline to improve its DPU-growth outlook and trigger further unit-price outperformance. Based on our new acquisition assumptions and revised estimates, we forecast CRCT’s industry-leading DPU CAGR (FY08-11) to increase to 9.0% (from 8.4%).

We believe the strong unit-price performance so far in 2009 has allowed the manager to set its sights again on acquisitions. Assuming that positive unit-price momentum can be sustained, we now believe CRCT can launch a successful acquisition and equity-fundraising deal that would be accretive for unitholders.

CRCT has a S$65.2m (15.5% of total debt) unsecured offshore loan due in FY09, a S$288.5m (68.7%) unsecured, fixed-rate, offshore loan due in FY10, and a S$66.3m (15.8%) onshore loan due in FY11.

We have raised our target price, based on our RNG-valuation method, to S$1.32 (from S$1.00). We have capitalised the portfolio’s estimated FY10 (previously FY09) core operating distribution at an effective cap-rate assumption of 6.0% (from 7%). CRCT’s target price to latest (March 2009) book of S$1.24 is 1.06x.