Central Pattana

Central Pattana Plc (CPN) 

Investment thesis

CPN’s operational data in 4Q14, released yesterday, may imply that the weak consumption has started to poison the mid- to high-income demographics. Although their purchasing power has remained solid, the weak sentiment has discouraged spending. From a top-down perspective, taking a position in CPN may not look attractive but from the bottom-up, we believe CPN is worth a long-term BUY. Despite slow rental growth, CPN’s cost-cutting program and expansion plan should help the firm to deliver good earnings growth of 14% in FY15 and 22% in FY16, while the current PER of 24.3x FY15 (-0.3SD) should limit any share-price downside.

Rental rate slowdown

CPN reported an average rental rate for short-term contracts of Bt1,492/sq.m/month in 4Q14, down 1% YoY and 2% QoQ. Its same-store rent rate grew only 1.3% for 4Q14, lower than our assumption of 4%, as the firm gave a rental discount of around 3% to tenants due to weaker-than-expected retail sales. The discount is likely to continue throughout the year as there is no sign that retail sales will recover soon. As such, we have cut our assumption on same-store rental growth for FY15 from 4.5% to 2.5%. 

Note that CPN still targets its same-store rental rate to grow by 5% and same-store revenue (including income from service, advertising and common areas) to rise around 5-7% in FY15, driven by higher consignment income as a result of the low base set by political turmoil last year. We recall that CPN offered 20-30% rental discounts to tenants at Central World in 1Q14 due to the road blockages caused by the political rally in front of the shopping mall.

Easing the impact by cost control

Despite the slow same-store revenue growth, CPN is likely to deliver a stronger profit than our previous estimate as the firm has been able to effectively cut expenses such as advertising and promotion. We have thus revised up our forecast on 4Q14 net profit by 3% to Bt1.84bn (up 11% YoY). This year, CPN aims to cut costs further and it should benefit from lower electricity bills. As such, despite the rental rate cut, we have trimmed our FY15 earnings estimate by only 1% and have cut the YE15 target price from Bt58 to Bt57.

Portfolio keeps growing; occupancy rate remains high 

CPN’s net leasable retail area (including space under CPNRF) rose to 1,388,313sq.m at YE14, up 8% YoY on the openings of new malls in Samui in March and Salaya in August. Its average occupancy rate increased back to 96% at YE14 from 95% at Sep’s end amid tenant changes at Lardprao and completed renovations at Bangna. This year, CPN plans to open three new malls (Central Plaza Rayong in May, Central Plaza WestGate in July, and Central Festival East Ville in October), which will increase its retail net leasable area by 10%.