Central Pattana

Central Pattana Plc (CPN) 

 

Investment thesis

The third quarter should be the last period from which slow earnings growth of below 10% YoY will be seen. We expect CPN’s high growth period to kick off from 4Q15 onwards on the back of four new projects added this year and the re-opening of Central Plaza Pinklao (CPP). Valuation is also undemanding. CPN trades at PERs of 25.3x FY15 and 20.3x FY16, versus its long-term average of 26.6x. As such, we think now is a good time to take a position in CPN. Our BUY stands with a YE16 target price of Bt65.

Rental growth to accelerate in 4Q15

Same-store rental rate is expected to rise only 1.2% in 3Q15 due to renovation of CPP and lower income from revenue-sharing contracts (34% of its retail portfolio) following weaker retail sales. However, we expect same-store rental growth to accelerate to 4.1% in 4Q15 on the back of completion of the CPP facelift and new contract renewals. After the facelift, CPN’s leasable space will be expanded 2,180sqm, while the space of 21k sqm from which revenue was amortized at a rate of Bt300/sqm/month under long-term lease contracts will be changed to short-term (up to three years) contracts, under which the rental rate averages Bt2,000/sqm/month. Regarding contract renewals, even with the prevailing consumption slowdown, CPN could still achieve a 5-7% increase in rental rate upon renewals of fixed-rent contracts. 

New project update

The number of new projects to open in FY16 should reduce to only one as its project in Nakhon Ratchasima is likely to be delayed until 1H17 given that CPN needs to review its market positioning and tenant mix in order to better cope with rising competition stemming from the refurbishment of The Mall (existing player) and the entrance of Terminal 21 onto the scene. Moreover, its project in Nakhon Si Thammarat may be delayed from the current schedule of 3Q16 as weakening consumption in the province following poor rubber prices may cause difficulty to fill the space. However, the delays trimmed our FY16-17 earnings estimates by only 2% and 1%, respectively, while its earnings growth profile remains concrete.

Minimal impact from residential projects

CPN will launch three condominium projects adjacent to its shopping malls in Chiang Mai, Khon Kaen and Chonburi valued at Bt1bn each in late 4Q15. The condos are expected to start breaking ground in 2Q16 and to transfer to homebuyers in 2Q18. In our view, these projects would not add much value to CPN as they are expected to contribute only around 2-3% to CPN’s FY18 profit, based on gross margin of 30-35% and net margin of 10-15%. On the other side, if the projects were to fail, the impact would be small as well. Note that we are a bit concerned as condos may not fit the preferences of the mid- to high-end demographics in those provinces.