REIT - CIMB Research 2016-03-06: Musical chairs begin

REIT - CIMB Research 2016-03-06: Musical chairs begin KEPPEL DC REIT AJBU.SI  KEPPEL REIT K71U.SI  MAPLETREE GREATER CHINACOMM TR RW0U.SI  CAPITALAND COMMERCIAL TRUST C61U.SI  CAPITALAND MALL TRUST C38U.SI  ASCENDAS REAL ESTATE INV TRUST A17U.SI 

REIT - Musical chairs begin 

  • “Lower-for-longer” interest rates underpin our Overweight stance. We advocate that investors play the game of musical chairs, based on relative valuations. 
  • S-REITs are still attractive, with 7.2% DPU yield in 2016, 460bp above Singapore 10-year bond yield. We forecast S-REIT DPU to rise by 2.9% yoy in 2016. 
  • For 2016, we anticipate that the office, overseas and healthcare REITs will post steadier yoy expansion, while the hospitality segment continues to be a laggard. 
  • We deem rising funding costs a manageable concern. 
  • Our top picks are KDC REIT, K-REIT & MAGIC. We advise investors to rotate out of CCT, CT and AREIT, switching to K-REIT, FCT and MLT, respectively. 


■ “Lower for longer” underpins our Overweight on the REIT sector 

  • Our house view that interest rates will remain lower for longer means that we believe SREITs will continue to garner investor interest. However, 2016 is expected to be characterised by slower topline improvement and a rising funding cost environment for S-REITs. 
  • In contrast to the previous upcycle, we think that the S-REITs’ share prices will remain range-bound in 2016. We advocate that investors be nimble and play the game of musical chairs, based on the relative valuations of S-REITs. 


■ OS-REIT DPU projected to rise 2.9% in 2016 

  • The sector offers an attractive average DPU yield of 7.2%, a 460bp spread over the 10- year bond yield, backed by stable income streams. 
  • We project that the S-REIT sector DPU will rise 2.9% yoy, backed by income growth from positive rental reversions and new contributions from acquisitions made the previous year. 
  • We anticipate that the office, overseas and healthcare REITs will post steadier yoy expansion, while the hospitality segment continues to be a laggard due to projected deterioration in RevPAR. 


INVESTMENT STRATEGY 


Back to “lower for longer” 

  • Going forward, with oil prices remaining low amid moderate global economic activity, the interest rate environment could likely remain benign in the near term. In his latest report (On the other hand, 23 Feb 16), our economist Arup Raha said: “we now think that, in all probability, the Fed is unlikely to raise policy rates this year. There is a precedent – in 1997, the Fed raised rates once but inflation failed to show up despite the unemployment rate going below 5%. The Fed’s next move was 18 months later when it cut rates…”

Investment strategy: A game of musical chairs 

  • Under a “lower for longer” and slow-growth environment, we believe yield instruments would continue to remain favoured. In addition, the fairly flat yield curve would be supportive of this sector. 
  • However, unlike the previous upcycle of 2012-13, where S-REITs experienced meaningful capital appreciation thanks largely to acquisitions fuelled by cheap credit, solid organic growth on healthier demand-supply dynamics and cheaper interest costs as the yield curve descended, our Overweight rating this time around is simply premised on S-REITs providing shelter from the helter-skelter elsewhere. 
  • This time around, all sub-sectors are anticipated to experience a simultaneous supply glut and softening demand through 2016-17. The S-REIT sector is projected to grow from the present 7% to 7.2% yield over the next 12 months. The bulk of this will be due to a full-year’s contributions from acquisitions made last year, with very slight organic growth from rental reversions. 
  • We have not factored in any acquisition accretion into our present numbers. 
  • On an adjusted basis, excluding divestment gains, we estimate the sector’s DPU to grow by an estimated 2.9%, with the overseas, office and healthcare REITs outperforming the sector. Further, acquisitions are getting more and more difficult to scour while rising short-term interest costs is crimping earnings. Hence, we believe that a meaningful share price re-rating is unlikely; and that S-REITs would trade in a tight band, capped in between their historical P/BV averages and one s.d below their respective means. In this vein, we advocate that investors be nimble and play a game of musical chairs, rotating in and out of a basket of REITs, based on their relative performance vis-à-vis peers.


KEY EARNINGS, RECOMMENDATION AND TARGET PRICE CHANGES 

  • We have updated our earnings estimates, target prices and recommendations following the recent results season. 
  • Overall, we have changed our DPU estimates by -2.7% to +2.8% for FY16 and -6.5% to +2.5% for FY17. Upward revisions were driven by the inclusion of the latest announced acquisitions, while downward adjustments to target prices were largely due to realignment of valuation metrics such as cost of equity. 
  • Our bottom-up approach leads us to believe that DPU growth will remain modest in 2016, with slower topline expansion and rising interest costs. Hence, we think the S-REITs’ share prices will remain range-bound in 2016. 
  • Our strategy favours S-REITs with strong income visibility and low gearing. Our top picks in the sector are KDC REIT, KREIT and MAGIC
  • Given the recent run-up in share prices of the big caps, we advocate that investors are selective in big-cap picks and rotate to the mid-cap stocks that offer better value. We recommend that investors rotate out of CCT, CT and AREIT, switching to K-REIT, FCT and MLT, respectively. We downgrade CCT, CT and AREIT from Add to Hold
  • Elsewhere, we downgrade Cache from Add to Hold due to possible earnings downside risk. We also downgrade OUEHT from Add to Hold as we realign our valuation metrics with its hospitality peers. We have also incorporated more dilutive equity fund raising assumptions for the stock.




YEO Zhi Bin CIMB Securities | LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2016-03-06
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.18 Same 1.18
ADD Maintain ADD 1.08 Same 1.08
ADD Maintain ADD 1.10 Same 1.10
HOLD Downgrade ADD 1.48 Same 1.48
HOLD Downgrade ADD 2.15 Same 2.15
HOLD Downgrade ADD 2.41 Down 2.42


CONTINUE READING:

  REIT - CIMB Research 2016-03-06: Sieving The Outperformers For 2016


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