Thursday, July 11, 2013

S-REITs: Time to selectively buy? (CS)

● On an absolute basis, most S-REITs are still above levels they were at in January 2012; when the rally started. Relative to the STI, REITS such as CDLHT & CMT have more than given up gains, while FCT, MINT and A-REIT are less than 10% ahead. S-REIT EPS in general have kept pace with the STI and MSCI SG.

● Other than in 2013, REITS (and telecoms, staples) have had low market Beta. Earnings volatility (other than for the GFC) has also been amongst the lowest in the market. Once the near-term sell off completes, S-REITs should revert to being defensives—which tend to be attractive during periods of regional growth concerns.

● Is the sell-off complete? The recent decline in S-REITs has compensated for the increase in SG 10-yr bond yields; spreads are still close to average. SG bond yields are closest to ‘normalised’ levels—and should ideally have less upside.

● REITs such as CMT, MCT, FCT should have strong DPU growth and should be more resilient to any economic slowdown. Industrial/Logistic—A-REIT & MLT have long lease life and should also see strong DPU growth. MINT appears attractive on risk-reward.

Giving up the gains
The reversal of the global ‘yield compression’ trade—upon the prospects of a US 'taper' and the consequent rise in bond yields (in the US and in SG) has deflated the strong rise in S-REITS since early 2012. As a basket (market cap weighted), REITs have given up close to half of their outperformance (relative to the STI) of last year. Some have fared worse—CDLHT, CMT are now behind market performance since Jan 12; while FCT, MINT, A-REIT are now less than 10% ahead.

Absolute or relative performance?
On an absolute level though, most REITs are still well above Jan 12 levels—when the rally started. An increase in bond yields affects the discount rate for all equities—though admittedly 'dividend' stocks were used to play the 'carry' trade—an unwind of which can potentially be disruptive. On headline, consensus EPS for REITS has grown in line with that for the STI over the last 2–3 years. Theoretically, there is little argument then, for S-REITS to underperform the market on net.

Defensive characteristics
Notwithstanding the recent volatility, S-REITS should place well within the 'defensive' portion of the SG market:
● Low market Beta: Other than in 2013 (YTD beta close to one), S-REITS have typically had low market Beta (around 0.4–0.6). On our estimates, only consumer staples (stocks such as Dairy farm, Thai Bev, Petra foods, Super) have had lower beta over 2010–12. Perhaps as a reflection of the yield trade, relative volatility of the telecom sector has also increased in 2013—over 2010–12.
● Low earnings volatility: Other than during the financial crisis, S-REITs also have low earnings volatility (measured by standard deviation of MoM changes)—along with telecom and staples. The REIT structure, and the generally higher leverage meant earnings revisions during the crisis were the highest for any sector in SG.

Once the recent sell down completes—and in the absence of a liquidity crisis, we believe the S-REITs should revert to being the traditional defensives—which tend to be attractive during periods of regional growth concerns.

Is the sell down complete?
In her note "Has the sector been oversold?" CS property analyst Yvonne Voon highlights that the decline in S-REITs has compensated for the recent increase in SG bond yields. Yield spreads in general are close to LT averages still. In her note (here), CS APAC strategist Sakthi Siva suggests SG bond yields are closest (amongst regional peers) to 'normalised' levels—and should ideally have less upside.

It will be difficult to time the bottom in the sector (especially for the sell side!), but we think investors should begin to look at some of the S-REITs. We like REITs with strong fundamentals—the retail ones (CMT, MCT, FCT) should have strong DPU growth and FY14 yields of between 5.6–5.9%. Mall usage (especially of the sub-urban variety) should also be more resilient to a general economic slow-down. The Industrial / Logistics REITs (A-REIT, MLT) have long lease life (low DPU volatility) and should also see strong DPU growth over the next three years. MINT—with a 7.2% yield is attractive on risk-reward, and should benefit from the expiry of old rental growth caps.

Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse
Publish date: 11/07/13

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Tan Teng Boo

There’s no such thing as defensive stocks.Every stock can be defensive depending on what price you pay for it and what value you get,
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