CPN Retail Growth Property Fund

Hold – Downgrade from Buy; Bt12.80

Price Target : Bt12.80 (Prev: Bt13.45)

·      Central Pinklao has been closed since 26 Oct 2011 due to floods; this is one of CPNRF’s three assets and accounts for 33% of revenue

·      Central Rama 2 at risk of being affected; this is CPNRF’s largest project contributing 40% to revenue

·      FY11F/12F earnings cut 7%/4%; downgrade to HOLD, TP reduced to Bt12.8 based on DCF

Loss of revenue from Central Pinklao shopping area since 26 Oct.  The fund will see loss of revenue from Central Pinklao shopping area, which contributes about 26% of the fund’s revenue. The office towers, which account for 7% of revenue, are still opened.  But we believe the fund will have to give a big rental discount to its tenants.  The magnitude of the loss in revenue depends on how long the area will be closed. The Fund has insured its investments against damage from flood together with business interruption.  To date Central Plaza Pinklao has not suffered any physical damage from the floods. CPNRF also has insurance policy to cover business interruption for up to Bt10m even if there is no physical damage to the asset. 

Central Rama 2 at risk.  With total lettable area of 93,489 sqm, Central Rama 2 is the fund’s largest asset, accounting for about 40% of revenue.  The impact to the Fund will be much larger if Central Rama 2 is closed.

Downgrade to HOLD.  We have cut our forecasts by 7% this year and 4% next year to reflect the impact of the flood on Central Pinklao, which we assumed will be closed for half a quarter in 4Q11 and could lead to rental reduction in 4Q11 and 1Q12. Accordingly, our TP is now cut to Bt12.80 based on DCF.  The stock offers 6.6% upside to our revised TP, plus 2012F dividend yield of 8.5%. Downside risk to earnings forecast if Central Rama 2 is to be closed due to the flood.