Croesus Retail Trust - CIMB Research 2016-11-12: Underpinned by inorganic income expansion

Croesus Retail Trust - CIMB Research 2016-11-12: Underpinned by inorganic income expansion CROESUS RETAIL TRUST S6NU.SI

Croesus Retail Trust - Underpinned by inorganic income expansion

  • 1QFY17 DPU of 1.79 Scts expected, at 23% of our full-year forecast.
  • Income growth from new acquisitions, notwithstanding some slight frictional vacancy.
  • Tenant remixing and upcoming AEI to provide another growth booster.
  • Potential cost savings from debt refinancing.
  • Maintain Add with unchanged TP of S$0.98.

1QFY17 DPU at 23% of our full-year forecast 

  • CRT’s 1QFY17 revenue jumped 56% yoy to ¥3125.7m thanks to contributions from new acquisitions such as Torius, Fuji Grand Natalie, Mallage Saga and Feeeal Asahikawa.
  • However, distributable income improved a smaller 25.4% yoy to ¥1152.2m with increased property expenses from the new purchases, partly offset by 1-month of cost savings of ¥29.9m from the internalisation of the Trustee-Manager, completed in Aug.
  • DPU of 1.79 Scts was 9.8% higher yoy due to a larger unit base.

Marginal frictional vacancy from tenant remixing 

  • Portfolio occupancy slipped marginally from 98.1% in 4QFY16 to 97.8% this quarter due to tenant remixing at Feeeal Asahikawa where occupancy dipped to 88.9% from 93.5% previously. Take up had since improved to 94% post 1Q. There was also slight frictional vacancy at One’s Mall and Torius. 
  • Nonetheless, with 88% and 79% of FY17 and FY18 income derived from fixed rent structures, CRT offers strong income visibility.

Organic growth to provide another income expansion driver 

  • Looking ahead, the successful tenant remixing of part of the space at Feeeal Asahikawa is expected to result in a 15% uplift in annual rental revenue at the property. 
  • In the medium term, further income booster could come from the planned AEI at Torius. While plans have yet to be finalised, we understand the AEI could involve expanding the existing NLA at the property by 5%. The exercise is expected to last between 12-24 months. We have not factored in this impact into our existing estimates.

Potential cost savings from debt refinancing 

  • CRT’s gearing stands at 44.6% with debt maturity of 2.2 years as at 1QFY17. It has 14% (¥7.46bn) and 24% (¥24.4bn) of debt to be refinanced in FY17 and FY18, respectively. It recently refinanced part of the FY17 debt with S$50m of 5% MTN notes due 2020 and intends to seek onshore debt sources as well. 
  • We expect to see good cost savings when the loan is rolled over, under the current low interest rate environment in Japan. This should reduce the current blended cost of debt of 1.93%.

Maintain Add 

  • We leave our FY17-19 DPU estimates unchanged post results and maintain our Add recommendation at DDM-based TP of S$0.98. 
  • CRT offers investors strong DPU visibility as its distribution income is hedged two years forward at SGD/¥ exchange rate of 83.57- 71.05. 
  • In addition to the strengthening currency and cost savings from its internalisation exercise, other growth drivers such as asset enhancements and potential cost savings from debt refinancing could provide further earnings uplift.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2016-11-12
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