Current Price S$0.92
Fair Value S$1.03
Vulnerable to exchange risks
1QFY14 operational performance was largely in line with expectations. 1QFY13 result was largely within our expectations. Revenue dipped 0.3% QoQ to JPY989.4m due a seasonal fall in average occupancy rates which resulted in the average occupancy rate dipping to 91.2% in 1QFY14 (4QFY13 : 92.1%, 1QFY13 : 91.7%). Net property income grew 3.3% QoQ to JPY701.2m due to lower repair and renovation expenses but we are expecting these costs to increase over FY14 as more repair and renovation works are in the pipeline to raise the competitiveness of Saizen’s properties amid an improving leasing market. NAV per unit at 24 Scts (JPY96.9) as at 30 Sep 2014 dipped in both yen and Singapore dollar (S$) terms due to distribution payment. We have kept our forecast largely unchanged.
Core assets continued generating stable operational cash for distribution, in yen terms. The core operations remained stable. In yen terms, operational cash for distribution is expected to grow, underpinned by a portfolio of growing residential assets with stable and healthy occupancy rate and stabilising rental reversion trend with overall rental reversion of new contracts in 1QFY14 dipping a marginal 0.3%. However, the dip was due to a negative rental reversion of 1.9% in July 2013 of several residential units that were contracted seven years ago, during pre-Lehman crisis. Rental reversion improved in subsequent months at +0.04% (August 2013) and +0.7% (September 2013).
Management displays prudence in slowing down acquisition activities. With the Japanese economic growth gradually gathering pace, asset prices have risen, particularly in Tokyo, and regional cities. Management has displayed prudence and has been careful not to chase prices. Over 1QFY14, there were no acquisitions made.
Actively looking to enhance unitholders’ value. Based on Saizen’s current gearing of 38% and an unencumbered property portfolio valued at about JPY2.0b, the headroom for loans growth and acquisition will be modest. But management is looking to undertake a strategic review to enhance unitholders’ value.
Valuation and Recommendation. The volatile JPY/S$ rate continues to pose currency risks. However, management has undertaken active forward hedging for the next two semi-annual distributions to mitigate the impact of a volatile JPY/S$ rate and to provide short-term distribution visibility. We maintain our valuation of Saizen at $1.03 assuming a JPY/S$ exchange rate of 81. Additionally, Saizen offers a yield of 6.9% (FY14F) and 7.0% (FY15F), backed by a relatively stable portfolio of assets valued at adjusted NAV per unit of S$1.19. At the current share price, price-to-book ratio (PB) of 0.89x (based on adjusted book per unit of S$1.03) is low compared to PB of 1.1x of listed peers in Japan. Maintain Long-term BUY.