Croesus Retail Trust - DBS Research 2016-08-29: New beginnings

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CROESUS RETAIL TRUST S6NU.SI

Croesus Retail Trust - New beginnings

• 4Q16 DPU of 1.70 Scts (-11% y-o-y after rights adjustment factor) was above expectations.
• First trust to be internally managed upon completion of recent buyout of trustee-manager.
• Expect earnings uplift in FY17 from recent acquisitions.

Internally managed to improve alignment and removes one barrier to a takeover. 

• We maintain our BUY call with a higher TP of S$0.99. 
• We believe the perception of a greater alignment between the interest of Croesus Retail Trust (CRT)’s unitholders and management following CRT’s move to be the first internally managed trust will help close the discount to our TP. This is despite dissatisfaction from some unitholders with the price paid to buy out CRT’s trustee-manager (c.S$50m) and concerns over the large upfront cash payment to the current management team for their stake in the trustee-manager. 
• In addition, with CRT no longer having an external trustee-manager, we believe this may remove a hurdle to a potential takeover by a J-REIT as speculated by some market participants due to CRT’s persistent high yield and discount to its NAV.

Boost from recent acquisitions. 

• Going forward, CRT should benefit from the full-year contribution from the acquisition of Torius property in Fukuoka (7.8% yield based on net property income (NPI)) in Sep15 and recent purchase of three retail malls (Fuji Grand Natalie, Mallage Saga and Feeeal Asahikawa) on 7.1% NPI yield. 
• In addition, with FY18 income hedged at SGD/JPY rate of 76.4 down from 83.6 in FY17, CRT has one of the highest growth rates among our SREIT universe with a two year DPU CAGR of 8% in SGD terms.

Medium-term upside potential from asset enhancement initiatives (AEIs). 

• Over the medium term, CRT should also receive a boost from potential AEI and/or tenant remixing at One’s Mall, Torius Mall and Feeeal Asahikawa. This is in addition to any further acquisitions.

Valuation

• After incorporating the internalisation of CRT’s third party trustee-manager, lower cost of debt and weaker SGDJPY FX rate of 76 versus 80 previously, we raise our DCF-based TP to S$0.99 from S$0.90.

Key Risks to Our View

• The key risks to our view include: 
  1. weaker JPY versus SGD, 
  2. higher-than-expected take-up of its Dividend Reinvestment Plan (DRP) which we have assumed c.25% take-up and 
  3. lower-than-expected uplift in rents.

Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-08-29

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.990 Up 0.900