Suntec REIT: BUY calls.

Suntec REIT is enjoying BUY calls from DBS Vickers and CIMB even as it prepares to acquire a one third stake in MBFC. Some salient points:

DBS Vickers

The group revalued up portfolio by 3.6% translating to NAV of $1.828/share. Going forward, Suntec has c14% of office and 27% of retail NLA due for reversion in 2011 and we expect office rents to show some uptick while retail component to remain stable.

Recent refinancing exercise of $700m due in FY12 are likely to lower its current overall cost of debt of 3.77% as the new loans were concluded at a lower spread of 1.5%, as well as smoothen out the group’s debt maturity profile.

We are tweaking our FY11 numbers by 3.1% to reflect the impact of recent refinancing exercise but exclude the effect of the MBFC1 acquisition. Maintain Buy call pending more information on the transaction. Based on FY10 and FY11 DPU of 9.8cts and 9.7cts, Suntec is trading at decent DPU yields of 6.3-6.2%. Our target price of $1.66 offers 12% total return.

CIMB

3Q10 NPI grew 7.6% yoy, led mainly by a 2.1% yoy increase in gross revenue on stronger office contributions and a lower property tax. Portfolio occupancy continued to strengthen on the back of better office occupancy which mitigated lower retail occupancy in the quarter.

Our DDM-based target price, however, has been raised to S$1.63 (discount rate 8.1%) from S$1.60 as we roll over to end-CY11. Maintain Outperform on further improvements in the retail and office outlook. We see near-term catalysts from more concrete signs of DPU accretion from the latest acquisition.

I would wait for the circular on the proposed acquisition and method of financing to be released to unitholders before commenting further.

Related post:
Suntec REIT: MBFC.

K-Green Trust: A bad investment?

There has been much discussion regarding K-Green Trust (KGT) and its yield. I agree that KGT's estimated DPU of 7.82c represents a partial return of capital.

Unlike Saizen REIT which owns freehold properties, for example, KGT's assets have limited lifespans. At the end of their lifespans, they would be returned to the Singapore government and there is no guarantee that their concessions would be renewed and if they were renewed, at what price?

KGT has a total of 3 assets:

1. Senoko Waste-to-Energy Plant

(Concession: 15 yrs fr 1 Sep 09: 14 yrs left)

2. Keppel Seghers Tuas Waste-to-Energy Plant

(Concession: 25 yrs fr 30 Oct 09: 24 yrs left)

3. Keppel Seghers Ulu Pandan NEWater Plant

(Concession: 20 yrs fr 28 Mar 07: 16.5 yrs left)

The Senoko Waste-to-Energy Plant is estimated to contribute to 50% of the Trust's income.  The Tuas Plant is estimated to contribute to 35% while the NEWater Plant is estimated to contribute to 15% of income.

Assuming that KGT pays out 100% of its free cash flow (and this makes it a self liquidating trust), does not engage in any acquisitions over the lifespans of its three existing assets and continues to have a DPU of 7.82c (representing 100% of its free cash flow) while it still has ownership of the said assets, buying KGT at $1.11 would take 14 years to get back my investment.  By then, KGT would be left with its Tuas Plant and NEWater Plant, the Senoko Plant's concession having ended.

Assuming that its DPU is halved after taking away the Senoko Plant, DPU would become 3.9c. This would continue for 2.5 years before the NEWater Plant's concession terminates and we would get a total DPU of 3.9 x 2.5 = 9.75c. Then, we would be left with 7.5 years of concession for the Tuas Plant and assuming the DPU is then reduced by 30% to 2.7c, we would get a total DPU of 2.7c x 7.5 = 20.25c.  In total, I would gain 30c for the $1.11 I invested earlier in August over a 24 years period or a total of 27% return which means a simple return of 1.13% per annum.  This rather simplistic estimation, however, assumes that KGT maintains the status quo which I think is highly unlikely.

KGT is a business trust and it does not have a gearing cap. It could have a gearing level of more than 45% and as long as it is able to generate income in excess of its interest payments and any regular debt repayment, we could see DPU increasing.

If it could land lucrative acquisitions with cheap debt, we could also see it reducing its payout ratio and keeping cash for asset renewal purposes. To think of KGT as a static business trust with no growth opportunities could be rather short sighted.  Why? Because it has zero gearing unlike CitySpring Infrastructure Trust.

Remember that KGT has Right of First Refusal (ROFR) granted by Keppel Corp on four projects which, more likely than not, would be DPU accretive acquisitions as KGT would most probably fund these with debt to begin with since its gearing level is zero:

1. Biopolis DCS Plant Biopolis@one-north, Singapore
2. Changi DCS Plant Changi Business Park, Singapore
3. Woodlands DCS Plant Woodlands Wafer Fab Park, Singapore
4. Amotfors Energi WTE Plant Sweden

Of course, this assumption has its premise on KGT having a competent management team that would take care of unitholders' interests. This remains to be seen.

Would I buy more of KGT? At $1.00, the price I originally thought of on 3 July, I would.

Related post:
K-Green Trust: Weak technicals.