Central Pattana

Central Pattana Plc (CPN)
Investment thesis: CPN is one of our top long-term picks among domestic consumption plays. Its growth profile is excellent—a three-year earnings CAGR of 25.2% and scope for earnings upside. On top of that, the street seems not to have fully taken the firm into account. The FY12 PER of 24.7x is discounted to both its 5-year average of 25.3x and the peer mean of 25.4x. Our BUY rating stands with a YE12 target price of Bt58.
Double-digit rental growth for the first time ever: The firm has started this year with impressive 1Q12 same-store rental rate growth of 10.8% YoY (excluding Central Lardprao and three malls that opened in FY11). The strong rental growth was underpinned by a reduction in the rental discount at Central World, the re-basing of rental rates at Chiangmai and Udonthani and major contract renewals at Pattaya Beach. 2Q12 looks even more exciting, as same-store rental growth is expected to touch a new high.
Consensus still lags behind: The street seems to have failed to take this strong rental growth momentum into account. Right after CPN announced a stronger-than-expected rental rate increase, we upgraded our FY12 earnings forecast by 18%, which pushed it to 23% ahead the street from only 5% above previously. Today, our estimate remains 17% higher than the consensus, which still anticipates only 7-8% rental growth this year. Some upgrade flows are expected.
A good asset appreciation play: The strong rental growth should make the value of CPN’s properties appreciate at a much faster pace than the norm. Excluding the effect of new projects, appraised value appreciated by 7.5% in FY11 and is expected to rise a further 11-12% in FY12.
Many new projects lined up: Besides the rent increase, new projects present a long-term earnings driver. Five developments are confirmed to debut in FY12-13, enlarging retail space by 15%, and another seven (yet to include in our model) are tentatively slated to open in FY14-15, adding another 22% to retail space.
Monetizing office building at Central World: We expect a net after-tax gain from spinning off CW Tower of Bt1.3-1.6bn, based on an asset value of Bt4bn and CPN subscribing to 20-33% of the new property fund. Note that we have yet to factor the gain into our model.
Outlook
Double-digit rental rate growth for the first time ever: CPN started this year with impressive 1Q12 same-store rental rate growth of 10.8% YoY (excluding Central Lardprao and three malls that opened in FY11). This strong rental growth was underpinned by 1) a reduction in the rental discount at Central World from 15% in 4Q11 to only 5% in 1Q12, 2) the re-basing of rental rates at Chiangmai and Udonthani to catch up with the rates at other CPN provincial malls and 3) major contract renewals at Pattaya Beach, now that it has been open for three years. 2Q12 looks even more exciting because same-store rental growth is expected to touch a new high, driven by higher YoY rents from low bases at Central World, Chiangmai and Udonthani (opened in full in May), as well as major contract renewals at Pattaya Beach and Chonburi.