Stock Picks 2017 - OCBC Investment 2016-11-28: A diversified portfolio with core earnings and decent sustainable dividends (Part 1)

Stock Picks 2017 - OCBC Investment 2016-11-28: A diversified portfolio with core earnings and decent sustainable dividends ASCENDAS REAL ESTATE INV TRUST A17U.SI CAPITALAND LIMITED C31.SI FRASERS CENTREPOINT TRUST J69U.SI FRASERS LOGISTICS & IND TRUST BUOU.SI GLOBAL LOGISTIC PROP LIMITED MC0.SI

Stock Picks 2017 - A diversified portfolio with core earnings and decent sustainable dividends (Part 1)


Ascendas REIT 

Large exposure to business and science parks, which has limited supply risks 

  • We like Ascendas REIT’s (A-REIT) significant exposure to the business and science park segment, given Singapore’s drive to move up the industrial value-chain and limited upcoming supply. A-REIT’s business and science park segments contributed 18% and 15% of its portfolio value, as at 30 Sep 2016. 
  • According to JTC’s 3Q16 market report on industrial properties, approximately 3m sq m of industrial space is estimated to come on-stream from 4Q16 till end-2017, versus average demand of 1.2m sq m in the past three years. However, if we further break down the upcoming supply, we note that only 0.6% would come from business parks. Collectively, AREIT’s business & science parks segment saw positive rental reversion of 2.8% for its recent 2QFY17 results (1QFY17: 4.7%), outpacing the 0.9% weighted average figure for its Singapore multi-tenanted properties. 
  • We understand that management is currently seeking to rejuvenate and reposition its science park portfolio and may work with its sponsor on this.

Focusing on Singapore and Australia 

  • A-REIT recently completed the divestments of its three properties in China in Jun, Jul and Nov this year and thus has no more properties left in China. With a good capital recycling strategy in place, we believe A- REIT’s focus will be on Singapore and Australia. 
  • Management has been building up its scale and platform in Australia since 2HCY15, which we believe is due to the low interest rate environment there, prevalence of freehold assets and long leases and positive industry dynamics. 
  • We maintain our BUY rating and S$2.67 fair value estimate on A-REIT. The stock offers FY17F and FY18F distribution yields of 6.8%, based on a closing price of S$2.30.

CapitaLand Limited 

Trading at 0.6x P/RNAV; Upside from China exposure 

  • CapitaLand (CAPL) is currently trading at a 38% discount to our RNAV per share of S$4.90. This represents a 22% upside to our fair value of S$3.68, which is at a 25% discount to our RNAV. 
  • CapitaLand also has a strong balance sheet, with 0.47x net debt to equity and a low implied interest rate of 3.4%. Around 70% of CAPL’s debt is fixed. 
  • CAPL’s exposure to China is primarily confined to resilient geographical areas; 93% of its portfolio in China by valuation is located in Tier 1 and Tier 2 cities. We are optimistic with CAPL’s presence in China; bottom-up fundamentals have remained firm with sales of CAPL’s residential units up 27% for 9M16 and retail mall operating statistics remain robust.

Recurring income from serviced residence, shopping malls, and commercial portfolios 

  • 76% of CAPL’s total assets contribute recurring income and provides strong income visibility in the medium term. 
  • Beyond China, retail mall operating statistics are robust in the four other countries with same- mall NPI (local currency) growth for 9M16 and committed occupancy rates of above 90% across the board. 
  • For serviced residences, we note the potential for strong growth in the medium-term as Ascott ramps up to reach its goal of 80K units by 2020. In addition, Ascott recently announced plans to capture the millennial market with new brand Lyf, targeting 10K units by 2020. In addition, we anticipate that the completion of four large-scale Raffles City mixed-developments from 2016 to 2018 (Raffles City Changning, Hangzhou, Shenzhen, Chongqing) will further boost recurring income. 
  • Considering the difficulties currently faced within Singapore property market, we view CAPL’s exposure to China as well as its recurring income streams as key advantages that differentiate it from other developers. 
  • We have a BUY on CAPL with a fair value of S$3.68.

Frasers Centrepoint Trust 

Expected to stay resilient 

  • Frasers Centrepoint Trust (FCT), which owns a portfolio of suburban retail malls in Singapore, is expected to stay resilient despite headwinds facing Singapore’s retail scene, in our view. We attribute this to its well- located malls in populous residential areas and strong track record of its management team. 
  • FCT has delivered positive DPU growth every year since its IPO in 2006, with a CAGR of 6.9% from FY06-FY16. Operationally, FCT secured robust positive rental reversions of 9.9% in FY16, which was a four-year high. It also has a healthy balance sheet, as gearing ratio of 28.3% (as at 30 Sep 2016) remains one of the lowest within the S-REITs universe.

Short term pain for long term gain 

  • Looking ahead, we project FCT to register flat DPU growth of 0.1% in FY17. However, this is largely due to the ongoing major renovation works at Northpoint, which is its second largest mall in terms of income contribution. Northpoint’s occupancy is estimated to range between 72%-80% from Oct to Dec 2016, and 58%-77% from Jan to Mar next year. Average occupancy during this period is expected to be 71%. Post completion of this asset enhancement initiative (AEI) in Sep 2017, management expects average gross rental rates at Northpoint to be boosted by ~9%, although the net lettable area is projected to be reduced by 4%. 
  • We forecast FCT’s FY18 DPU to rebound by 2.7% to 12.1 S cents. Based on our forecasts and a closing price of S$1.955, FCT offers investors a distribution yield of 6.0% and 6.2%, respectively. 
  • Maintain BUY and S$2.33 fair value estimate on FCT.

Frasers Logistics & Industrial Trust 

Large portfolio with positive attributes 

  • Frasers Logistics & Industrial Trust (FLT) owns a portfolio of 53 prime industrial and logistics assets strategically located within established industrial and logistics precincts across five states in Australia. It has a high portfolio occupancy rate of 99.2% (as at 30 Sep 2016) with a diverse and high quality tenant base spread across a broad range of sectors. FLT’s portfolio WALE is also relatively long at 6.6 years as compared to its Singapore listed industrial REIT peers. 
  • Recently, FLT reported its maiden results for the period since its listing on 20 Jun 2016 to 30 Sep 2016. DPU of 1.84 S cents beat its Prospectus forecast due to lower-than-projected finance costs, a more favourably hedged exchange rate and acquisition of two call option assets from its sponsor.

Expected to stay defensive 

  • Looking ahead, we expect FLT to remain resilient as it has minimal leasing risks in the near-term, with only 0.5% of its leases (by gross rental income) expiring in FY17. Moreover, management has been prudent and has hedged 100% of its estimated distributable income for FY17. Gearing ratio is also healthy at 28.2%, as at 30 Sep 2016, with 84% of its total gross borrowings hedged. 
  • We believe demand and supply dynamics for Australia’s industrial market remain largely favourable, with room for further cap rate compression for FLT’s portfolio. The low interest rate environment in Australia, population growth and infrastructure spending by the government are expected to drive tenant demand for industrial space. 
  • We reiterate our BUY rating and S$1.10 fair value estimate on FLT, which is trading at an attractive FY17F distribution yield of 7.2%.

Global Logistics Properties 

Market leader in China, where e-commerce boom is set to drive growth in logistics demand 

  • Global Logistics Properties (GLP) is the leading logistics provider in China, which accounts for 56% of the group’s net asset value. In particular, E-commerce and chain stores occupied ~25% of GLP’s leased area in the country, and we expect the demand from such tenants to increase with the development of China’s retail market. 
  • Furthermore, the long-term supply of logistic properties in Tier 1 cities remains constrained by the scarcity of land in strategic locations – only 4 plots of land were listed for sale in Tier 1 cities for 9M16.

Conservative capital allocation and a robust balance sheet 

  • Considering the risks with expansion in fast-moving markets, GLP has practised conservative capital allocation: it has a policy of commencing developments only when indicative demand surpasses 1.5x. 
  • We are also encouraged by its robust balance sheet, which has a low net debt to assets of 27% and a high proportion of fixed-rate debt at 64%.

Moving towards an asset-light model 

  • GLP has leveraged on its fund management platform to scale its business – the portfolio has increased five-fold in five years while maintaining a low gearing and a strong balance sheet. The fund management business provides GLP with a recurring fee income stream, which is in addition to its share of development & rental income, thus enhancing its returns for every dollar invested by 300 to 500 bps. ~67% of GLP’s assets today are managed in funds and this is expected to increase as they move towards an asset-light model. 
  • We have a BUY on GLP with a fair value of S$2.37.

Carmen Lee OCBC Investment | http://www.ocbcresearch.com/ 2016-11-28