Property Development & Inventory - CIMB Research 2016-01-22: Poised for outperformance

Property Development & Inventory - CIMB Research 2016-01-22: Poised for outperformance Beaten down valuations CITY DEVELOPMENTS LIMITED C09.SI  CAPITALAND LIMITED C31.SI  CAPITALAND MALL TRUST C38U.SI  MAPLETREE LOGISTICS TRUST M44U.SI  KEPPEL DC REIT AJBU.SI 

Property Development & Inventory - Poised for outperformance 

■ A shaky start to the year but value emerging 

  • Singapore property stocks and S-REITs have seen a 14% and 3.6% decline, respectively, since the beginning of the year, with the broader FSSTI losing 11.5%. 
  • Global recessionary concerns arising from a record-low oil price, coupled with an oversupply in most property segments, and the challenging operating environment for developers and landlords, have been a drag on sentiment on property stocks. 
  • Property stocks are trading at a 45% discount to RNAV, and at 0.64x P/BV, are below the -1s.d. discount to mean mark. 
  • At this point, we think much of this pessimism appears to have been largely priced into the stocks. 

■ Outlook 

  • While we agree that 2016 will be another challenging year for the physical property market, on the back of weak demand and significant supply overhanging the sector, we believe that investors should look beyond this pessimistic scenario. 
  • Our base case assumption would be for Singapore to be stable, even though experiencing low growth. 
  • Future supply across all property segments are being cut back and in the medium term when much of this overcapacity has been absorbed, we believe Singapore could be well placed to benefit from potential regional activities and collaborations such as spillover impact from the AEC or TPP when it takes place. 
  • Within the different sub-sectors, we have assumed that residential prices would correct by another 5-8% this year, while office rents should see a 15-20% retracement over this year and next. We think industrial rents should correct by up to 5% this year, and hotels could also see a 5% deterioration in Revpar. 
  • Retail could hold up relatively better with a very marginal uplift in rents. Developers’ valuations are very cheap, given that the sector is trading below the -1s.d. discount to mean. Hence we OVERWEIGHT the sector. 
  • We think property stocks could range-trade in the near-term in the absence of fundamentals, but any catalyst could cause a sharp rebound given the beaten down valuations. We see RNAVs remaining relatively stable with any depreciation in residential and office values already likely priced into valuations. 
  • We think developers’ profiles are different this time around when compared to the most recent cycle. A number of them have ventured overseas over the past two years, and the fruits of these overseas diversifications should be felt more marked on earnings from this year. For example, HoBee Land, in addition to its Metropolis building in Singapore, has acquired 6 office properties in UK which is generating strong recurrent income through long leases and has changed it income profile from a largely development income driven to one with stable recurrent cashflow. 

■ Strategy 

  • Our strategy for the developers and S-REITs would be to look for attractive valuations with robust balance sheet and strong cashflow generation capabilities and ability to recycle capital through asset monetization exercises. In addition, for S-REITs, the rate hike cycle has begun and we believe S-REITs that can grow organically or via acquisition would be able to offset the impact of rising interest expense on earnings. 
  • Although there is a significant disconnect between equity and underlying asset values, there is still good interest in buying opportunities in the physical market. We believe developers with the ability to recycle capital through asset sales would continue to outperform its peers. Recent monetization of 3 commercial properties by City Dev and sale of Rivervale Mall by CapitaMall Trust at above book values are good examples of ability to monetize assets to recycle capital and boost ROE in the medium term. 
  • Within the S-REIT space, given the tightness of the domestic acquisition market and tight yields, we believe that going overseas would allow S-REITs to explore more avenues of growth. Whilst this would increase exposure to forex volatility, we believe the REITs can hedge and limit the impact from these activities. 
  • Our current FY16 sector DPU yield projection is at 7.9% implies a 540bps spread over the 10-year bond yields and a 5.3% yoy growth. Hence, we think much of the rate hike expectation have been priced in. On the flipside, at this level, S-REITs would find it hard to find accretive purchases in Singapore and would likely have to explore overseas markets for growth. 

■ Valuation and recommendation 

  • Given the near-crisis valuations for developers, we retain our Overweight rating on the sector. In terms of our top picks, we like Capitaland and City Dev for their attractive valuations and diversified business models. Our picks amongst S-REITs are CMT, MAGIC and Keppel DC REIT
  • In this regard, we think Capitaland and City Developments are the most likely beneficiaries of capital recycling exercises. Capitaland has stakes in Westgate and StarVista malls in Singapore as well as a slew of shopping malls in China that are starting to mature and could potentially be monetized. For City Dev, recent commercial PPS transaction has enabled the group to monetise its assets and still potentially enjoy further upside through its participation in the PPS. 
  • Given the acquisition and redevelopment opportunities within its portfolio, we believe CMT has resumed a steeper growth path going forward. The stock is offering FY16 DPU yield of c6%. We like MAGIC for its exposure to the HK$, which is a proxy to the strengthening US$. Moreover its properties such as Festival Walk is resilient and has outperformed the current weak retail in HK. MAGIC offers investors attractive FY16 DPU yield of 8.7%. 
  • Our pick within industrial REITs is Keppel DC REIT, which is a beneficiary of the big growth in data storage and storage needs. The stock has a strong and visible growth trajectory, thanks to a pipeline of assets from its Sponsor. It is trading at 7.1% FY16 DPU yield. 

City Dev (CIT SP, Add, TP: S$10.50) 

  • CIT’s valuation is attractive at 0.74x P/BV. 
  • Its balance sheet is strong, particularly after the recent commercial PPS transaction, which enable the group to monetise c.S$1.1bn in assets. 
  • Near-term catalysts include a potential special dividend as a result of this sale. 

Capitaland (CAPL SP, Add, TP S$4.06) 

  • We like CAPL for its diversified business model and ROE-boosting capital recycling activities. 
  • With its portfolio of assets in Singapore and China maturing, we think prospects for further asset recycling is likely. 
  • The stock is trading at an attractive 40% discount to RNAV. 

CMT (CT SP, Add, TP S$2.28) 

  • We believe CMT can achieve a steeper growth path going forward, thanks to redevelopment opportunities within its portfolio as well as acquisition potential form its Sponsor. 
  • It is trading at FY16 DPU yield of c6%. 

Mapletree Greater China Commercial Trust (MAGIC SP, Add, TP S$1.20) 

  • We like MAGIC’s resilient portfolio that has outperformed the broader HK retail market. It is also a proxy play into the US$ strength. 
  • Yield is attractive at 8.7%. 

Keppel DC REIT (KDCREIT SP, Add, TP S$1.18) 

  • KDCREIT is a unique pure-play data centre REIT in Asia and is a beneficiary of the Big Data boom. 
  • It offers strong eearnings groth of 8% and DPU yield of 7.1%.

LOCK Mun Yee CIMB Securities | Yeo Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-01-22
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