Current Price S$2.36
Fair Value S$2.59
Another positive development to close valuation gap
2QFY13 NPI fell as expected due to disposal of Central Plaza. 2QFY13 net property income (NPI) of S$13.5m fell 13.0% QoQ on the back of a 12.1% QoQ fall in gross revenue to S$20.5m largely due to the fall in rental income following the disposal of Central Plaza on 23 May 2013. The core stabilized commercial portfolio continued to enjoy a steady and high occupancy of 94.12% and 94.77% at The HQ office towers and Forterra House respectively. Twenty-six leases (new and renewals) on these assets were also successfully negotiated at an average rental increase of 7.53% (1QFY13: 12.43%) over the expiring leases.
Contributions from the remaining assets, Huai Hai Mall, Central Avenue Mall and Beijing Logistics Park were stable as expected. 2QFY13 net operating income (NOI) of S$7.2m was lifted by disposal gains from the sale of Central Plaza of S$18m. Excluding this gain, NOI incurred steeper losses of S$10.8m in 2FY13 (1QFY13: loss of S$6.5m), a reflection of high financing costs. 2QFY13 NAV (fully diluted) rose to S$4.54 per unit (1QFY13 : S$4.25 per unit), largely as a result of gains from the disposal of Central Plaza and capital expenditure on the construction of The HQ Extension.
Nam Fung Group’s investment will lift market confidence and close valuation gap. Efforts by Richard Barrett, a director and 100% owner of Oriental Management Services (OMS), the trustee and property managers of Forterra Trust (FT) to make parallel progress between National Asset Management Agency of Ireland (NAMA) and liquidators, as well as conditional contracts with Nam Fung Group (NF), one of the largest privately-owned property developer in Hong Kong, to acquire 29.98% of FT and 100% of OMS will lift market confidence on FT. NF will lift the financial standing of FT, and can potentially offer management expertise to FT as well. On 2 Aug 2013, NF confirmed satisfaction with orders made by the Irish High Court on 1 Aug 2013 pertaining to the conditional contracts. Pending fulfillment of further conditions, the deal is expected to complete by 31 Aug 2013 at the latest.
Pre-leasing commitment at The HQ grew to 56.67%. The successful and timely completion of The HQ development remains critical to lift FT’s long term stable earnings to the next level and to provide certainty of liquidity. The development progress at The HQ remains on track and pre-leasing commitment has reached 56.67% (as at 30 Jun 2013) for the retail space, up from 50.5% as at 31 Mar 2013.
Sale of Central Plaza offers certainty of liquidity and financial flexibility. Despite tight credit market conditions and slowdown in the PRC economy, the successful sale of Central Plaza at a small 7.9% discount provides market confidence on FT’s property portfolio. Further, the sale unlocks value of the property to enhance unit holder’s value, as well as lifts liquidity, providing funds to support the development at The HQ and working capital needs of the Trust. Management is now pro-actively looking to dispose Beijing Logistic Park (100% occupancy rate) to further improve liquidity certainty of FT.
Valuation and Recommendation. The successful sale of Central Plaza offers financial flexibility, providing the option to pare down costly debt to lift portfolio yield. However, considering potential development delay and pending greater certainty to the pre-leasing activities at The HQ, we believe management is likely to exercise prudence and re-commence dividend distributions only by FY15. Using cap-rate approach, we maintain our cap rate assumption and value the assets at RNAV per unit of S$4.32 (FY13F) (previously RNAV per unit of S$4.27 (FY13F) on a fully diluted basis. Successful completion of NF’s conditional acquisition is expected to further close the steep valuation gap ensuing from loss of potential yield and execution risk at The HQ. We lower our discount to valuation to 40% from 50% previously to arrive at our target price of S$2.59 (previously S$2.13) which still offers upside of about 10%. Maintain Long-term BUY.
Publish date: 07/08/13