Singapore Property core earnings slightly ahead

Top Picks
Mapletree Commercial Trust (MACT.SI), SGD0.87 Buy
CapitaMalls Asia (CMAL.SI), SGD1.52 Buy
CapitaCommercial Trust (CACT.SI), SGD1.22 Buy
Keppel Land (KLAN.SI), SGD3.45 Buy

Underlying trends decelerating; strong balance sheets a positive.
Core earnings came in slightly ahead with a positive surprise on dividends. Underlying trends continued to decelerate particularly for residential & office. Most developers continue to lose market share in SG with a sharp drop in China sales, suggesting unexciting development profit growth. Trends for retail & industrial REITs were firmer with cost pressures a rising concern. Balance sheets are generally strong and, coupled with a bottoming out in the economic cycle, suggest less downside risk on prices. Buy CMA, KepLand.

Developers’ 4Q core earnings slightly ahead; sluggish offshore sales
4Q headline PATMI fell 21% on average, reflecting lower revaluation gains, but core earnings surpassed our estimates by 13%, on higher offshore completions and profit recognition timing. Offshore sales continue weak with China unit sales for Capl and KepLand down 60% and 75% QoQ. In SG, apart from CDL, which benefited from strong mass market momentum, other developers continue to surrender market share to FEO, FCL and smaller players.

Steady results from REITs; sustained cost pressures an ongoing challenge
The REITs under coverage delivered slightly better-than-expected results with DPU up 3.8% YoY, 2.0% QoQ on average (excluding KREIT). The office REITs (CCT, SUN) surpassed our reduced expectations with negative rent reversions well anticipated. Organic growth trends for the industrial REITs surprised, with firm rent reversions despite the macro uncertainty. Intensifying cost pressures were a common theme across the board, which eroded CMT’s 4Q DPU.

Stable underlying trends; macro deterioration yet to filter through fully
Despite the manufacturing slump, industrial landlords maintained/improved occupancy and enjoyed strong rent reversions (+9-32%) but management guidance has turned more cautious. The deterioration in office was relatively contained, with most REITs focused on preserving occupancy, holding rents and forward leasing, which helped reduce FY12 expiries to 10% or less. Backfilling and pre-commitments have slowed as occupiers turned more cautious. Retail was steady, with healthy growth in tenant sales and shopper traffic.

Capital management a continued focus; developers still looking to deploy
REITs continue to take advantage of low interest rates by refinancing early and lengthening maturities. Except for a few REITs, sector average gearing remains comfortable at 31%. While managers continue to eye acquisitions, there is increasing focus on AEI and development. Developers’ balance sheet capacity remains good which should provide firepower for counter-cyclical landbank restocking (particularly for KepLand), with China likely to be a key focus market.

Cautious on residential; CMA & KepLand preferred; MCT, CCT, AREIT for REITs
We value the developers using an RNAV methodology and REITs on DDM. The developers are now trading at an average 27% discount to RNAV (vs. a longterm average of 20%) while the REITs are yielding 6.9% for CY12e and 7.0% for CY13e. We remain positive on CMA, with 2012 the inflection point for China earnings. KepLand also looks well-positioned for NAV-accretive acquisitions with its under-geared balance sheet. Risks: a sharp slowdown in growth affecting housing and leasing demand, credit and capital market deterioration, acquisition and capital raising risk.

PATMI = Profit After Tax and Minority Interests
DPU = Distribution Per Unit
RNAV = Revalued Net Asset Value

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