Central Pattana

Central Pattana Plc (CPN)

Investment thesis
CPN is one of the best domestic consumption plays in Thailand at the moment. The company is exposed to only limited downside risk associated with slowing consumption spending, while there is scope for upside to our earnings projection. Even though we have yet to factor in undisclosed projects (3-4 developments a year, starting FY15), our model indicates a strong three-year core earnings CAGR of 29%. With this growth profile and the potential for upside, we think the current PER of 25.5x for FY14, which is in line with CPN’s long-term average, constitutes an attractive entry level. Our BUY rating stands with a YE13 target price of Bt63.
Only limited downside risk
Within Consumer space, CPN entails the least downside risk, as fixed rent and long-term lease contracts comprise 48% and 27%, respectively, of total space. The current slowdown in consumption spending won’t be severe or long enough to prompt a rental discount.
Downside risk to revenue-sharing contracts (25% of total space) is also limited, thanks to minimum guarantees. Moreover, most of the tenants on these contracts are restaurants and high-end fashion shops, which aren’t directly impacted by the hiccup in discretionary spending among lower income demographics. Under the worst-case scenario where all tenants on revenue-sharing contracts pay only the minimum guarantee, our FY13 core profit projection would decline only 0.5%/month.
Solid rental income growth
Despite the slowdown in consumer spending, CPN has been able to command higher rental rates upon contract renewal. Same-store rental growth was 7% in 1Q13 and should stay at this level through to YE13, buoyed by higher rental rates at the Chiangmai, Chaengwattana, Pitsanulok and Khonkaen malls. With regard to Central World (CW), even though its rental growth has slowed from about 20% in FY12 (when it discontinued discounts) to 6-7% this year, it will remain a major growth contributor—we expect a material rise in its occupancy rate when the H&M flagship store (5,000sq.m, 3% of CW’s rentable area) opens in Sept.
To book huge spin-off gain in 4Q13; more scope for upside ahead
CPN has confirmed that it will sublease some space (35k sq.m) at Central Plaza Chiangmai Airport worth around Bt10-12bn to CPNRF for 30 years. The transaction is expected to take place in October. Assuming that CPN maintains its stake in CPNRF at 27.8%, the net spin-off gain should be Bt5-6bn. Note that we assume the asset value at Bt10bn in our model. After the spinning off, net gearing should fall to only 0.2x, implying that CPN would have another Bt42bn to spend on 8-12 projects (in addition to five announced projects) before net gearing hit its policy ceiling of 1.0x. As such, we expect management to announce more projects soon, which would prompt earnings forecast and valuation upgrades.