STI : 3,191.08
Price Target : 12-Month S$ 1.02
Trading at attractive DPU yield.
• Good set of maiden results coupled with effective cost management
• Dual growth drivers from positive rental reversion and potential acquisitions
• Maintain Buy, TP S$1.02
Decent set of maiden results. Croesus Retail Trust (CRT) reported maiden gross revenue of JPY1.998bn for the period from 10 May - 30 Sep 2013, which was 0.4% ahead of forecast. NPI was 3.1% higher than projected and came in at JPY1.269bn, translating to a higher NPI margin of 63.5%. Distributable income of JPY1.139bn was 8.3% higher than projections and translates to a DPU of 3.26Scts. This was ahead of prospectus forecast of 3.11Scts.
Boosted by effective cost management. Despite slightly higher than expected revenue, the larger improvement in bottomline performance was due to lower than projected property expenses as well as property tax rebates and a decrease in effective tax rate. This was partly offset by the difference between the actual and forecasted distribution hedge rate for the period.
Dual growth drivers. Looking ahead, earnings are likely to be driven by organic as well as acquisitions. In the near term, the recent completion of a 1,000sm extension at the property and fully leased by Uniqlo, should provide another uplift to income. In addition, with 24% of its portfolio leases expiring in FY15, largely coming from Mallage Shobu, the trust is well placed to benefit from higher rentals given that the leases were largely signed in 2008 during the GFC. The Trustee Manager intends to replace 60% of the expiring leases with better and bigger brand names to improve tenant mix and is looking to increase rents for another 20% of the renewal leases.
Debt headroom of cJPY15bn. Furthermore, plans to tap new acquisitions are likely to provide another growth driver, particularly those under its ROFR pipeline. With a gearing of 42.3%, it potentially has a debt headroom of cJPY15bn (based on a 50% gearing) to fully debt fund acquisitions. The current estimated NPI yield around 6+% offers an attractive yield spread against average cost of funds of 2.5-3%.
More potential upside from acquisitions. We maintain our Buy recommendation with a TP of S$1.02. This offers a total return of 25%. In addition, the suburban retail market has seen a 10bps compression in yields in suburban Nagoya and prime Osaka while in suburban Tokyo, yields have compressed by 30bps. This should be supportive of CRT's existing book NAV and share price. Near term catalyst could materialise when the acquisition growth driver is activated.
Publish date: 15/11/13