Ascott Residence Trust: Signs of stability

QoQ improvement. Ascott Residence Trust posted a 2% QoQ increase in 2Q revenue to S$43m, and a 1.4% QoQ increase in distributable amount to S$11m. The 1H distributable amount made up 53% of our full year estimate. Portfolio RevPAU for the quarter was S$119 compared to S$120 in 1Q09. ART will pay out 3.55 S cents for 1H09.

Performance encouraging. Market concern was that performance would continue to slide in 2Q09 on top of the steep falls in the last two quarters. Instead performance in major markets levelled off or recovered slightly. ART noted that corporate travel is showing signs of life: for instance, project group demand - which had largely dropped off as companies froze spending - is back, albeit on shorter commitments. Going forward, the manager sees "signs of stability with a slight bias towards an uptrend" as aggressive marketing efforts and steep rate cuts pay off. Singapore and China guidance was positive. We do note that our channel checks show continued rate weakness and aggressive free-nights promotions in the Shanghai and Beijing markets. Generally the extended-stay market seems to have bottomed out but the size and shape of the recovery is still uncertain, in our view.

Balance sheet concerns easing. ART recorded a revaluation deficit of S$61m, with 2Q NAV down 10% QoQ to S$1.36. The manager maintains it is comfortable within 45% leverage (40.7% now) and 3x interest cover (3.4x now), and does not need to recapitalize its balance sheet. The credit markets have unclogged and we don't expect the S$105.7m loan maturing this year to present any significant refinancing challenges. We also believe that the need for, and impact from, any recapitalization-focused cash call has diminished in view of the recent price rally and improved operating outlook. Any equity-raising attempt would likely be paired to an acquisition, in which case ART can afford to wait for even better equity pricing.

More benign expectations. Our FY09F and FY10F distributable amount estimates are up 9% and 17% over previous estimates, reflecting our expectation of stabilization at current levels. Our new SOTP value for ART is S$1.14 (prev: S$0.82). This excludes our previous cash call assumption, as its current valuation impact is minimal. Market conditions have eased dramatically and we feel the risk of further stress on ART's portfolios and balance sheet has abated. Consequently, we are lowering our "uncertainty discount" to SOTP from 25% to 15%. Our new fair value estimate is S$0.97 (prev: S$0.61). Upgrade to BUY.

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Frasers Centrepoint Trust: Boring But Defensive

3QFY09 results in-line with expectations. FCT reported a 3.2% YoY gain (+4.3% QoQ) in 3QFY09 DPU to 1.94¢. Annualised DPU of 7.3¢ came in slightly ahead of our forecast but in-line with consensus. FCT will trade ex-3Q09 distribution on 30 Jul 2009. Price target raised to S$1.17 (S$0.83 previously) to reflect a lower cost-of-equity assumption of 7.5% (9.5% previously) and terminal growth rate of 1% (nil previously).

Who says boring is bad? Apart from its resilient suburban portfolio, FCT stands out among the S-REITs as one of the least aggressive in terms of acquisitions. On hindsight, we think management has been among the most effective in terms of preserving the stock’s theoretical valuation through its strong asset enhancement initiatives and cautious acquisition stance. With that, FCT continues to boast commendable financial credit metrics and a strong balance sheet, which does not warrant any dilutive equity capital raising in the foreseeable future.

Resilient portfolio with limited downside. At current prices, FCT offers investors a dividend yield of 7% for FY09 and 7.2% for FY10. Causeway Point and NorthPoint, which contributes to 92% of NPI, are suburban malls which are resilient even during periods of recession. FCT has a strong balance sheet with gearing of 32.7% and interest cover of 4.5x. As all acquisitions are put on the backburner, there is no need for any equity raising in the near-term.

Low beta and high earnings resilience justify lower COE assumption. Like most REITs, FCT has risen sharply (+75%) since Mar 09, providing a forward yield spread of 470bps above riskfree instruments, 110bps above its historical 360bps average. Despite the sharp increase, we think a forward yield of 7.2% continues to underscore our BUY justification on the counter. This is in view that FCT has one of the lowest betas (0.75x) among S-REITs, which typically average 1.1x. The relative stability of the stock price justifies a lower cost-of-equity assumption, hence higher theoretical fair value. Stock still undervalued at current levels. Trade stock to S$1.17 (~6% yield).

CapitaLand - Above expectations: Good core earnings offset by S$1.1 bn CB

CAPL reported a 2Q09 net loss of S$157 mn, its first headline quarterly loss since 4Q03, with the bottom line weighed down by net exceptional losses of S$281 mn. Core net profit came in at S$124 mn (+163% qoq), above our 2Q09 estimate of S$92 mn, as China residential led growth. For the quarter, key positives include: 1) strong China residential, 1,163 units sold in 1H09 (780 units in 2008), 2Q EBIT up 4X qoq; 2) soft opening of ION Orchard in July, 96% mall occupancy and higher-than-expected revaluation, S$3,800 psf; 3) deleveraged B/S post-rights issue in 1Q09; gearing at 0.43X. Key negatives include: 1) Singapore office portfolio marred by downward asset revaluations, and 2) AustraLand’s operations remain challenging, 1H09 operating profit ex. revaluations fell 11% hoh. CAPL also announced a S$1.1 bn convertible bond issue, coupon 2.375% and YTM of 2.875%, with a conversion premium 20%-25% above the prevailing share price. If converted, this would account for around 5% of the current share base.

We believe the focus should be on stabilizing core operations and the FY2010 outlook. While 1H09 core profits constitute 41% of FY09 estimate, we think profit recognition from SG resi will be more meaningful in 2H09. In Singapore, up to 1,165 units will be launch-ready by 2H09 from Gillman Heights and Char Yong Gardens. In China, the group is committed to an additional capital injection of S$500 mn (a 25% increase) in the short term. On the bond issue, this would mark CAPL’s fourth successful bond issue; while seen as strengthening its long-term financing and debt maturity, the narrow premium and potential dilution may be a near-term overhang on CAPL. Maintain Buy (Conviction List) and RNAV-based 12m TP of S$3.90.