Execution is key
Management’s execution ability will be the key in FY14, with the earn-out set to expire at the end of 2014. There will be greater interest rate risk as PCRT makes progress payments. Potential divestments could help unlock value and recycle capital.
We maintain our target price of S$0.57, which is based on a 20% discount to RNAV. Under our new rating structure, our rating changes from Neutral to Hold. We will revisit the stock if the gestation period is shorter than expected.
Execution is key
With the earn-out expiring at end-2014, the pressure is on management to strengthen rental contributions and earnings delivery. Both of PCRT‟s wholly-owned malls will be operational in 2014, with Jihua opening in Aug 2013 and Qingyang set to open by 1Q2014. The malls‟ contribution to PCRT‟s 2014 distribution could be hampered by pre-opening expenses and the rent-free fit-out period. However, committed occupancy for the malls looks healthy, with Foshan at 95% and Qingyang at 75%. Therefore, the key really is to improve footfall and tenant sales at the malls to bridge the gap between turnover and fixed rent, in our view. The Shengyang Longemont Shopping Mall, opened in Oct 2011, is making good progress in ramping up occupancy, strengthening the tenant mix and improving shopper traffic. But much of the turnover rent has yet to come through. We look to that as a guide and expect rental reversion to come in after a rental cycle (typically three years) and the turnover rent to kick in gradually and stabilise in FY15-16.
Interest rate risk
We expect asset leverage to increase to 38% in FY14 as PCRT makes progress payments, exposing the trust to greater interest rate risk. PCRT‟s current weighted average interest rate of 4.22% is higher than its peers‟ c.2.3%. Of the existing S$415.2m debt, only 46% is fixed rate.
The FY12 valuation, at 6.5% cap rate (unchanged from FY11), is up to 58% above the purchase price of assets. Therefore, divestment gains could be substantial. As two of its wholly-owned malls ramp up operations, strata or en-bloc sale will allow PCRT to unlock value and recycle capital.
Publish date: 29/11/13