Central Pattana

Central Pattana Plc (CPN)

Investment thesis: The information we grabbed from management at the Opportunity Day yesterday has not only eased our concerns about the impact of the flooding, but bolstered our confidence in the rental growth outlook. Despite the hiccup brought by the flooding, domestic consumption spending remains strong and looks set to make for robust growth next year, particularly upcountry. As a leading beneficiary of urbanization and lifestyle shifts in the provinces (our key theme for Thai consumer plays), we maintain our BUY call on CPN with a YE12 target price of Bt44.
Good news: The effect of the flooding appears less severe than we initially feared. CPN now looks unlikely to offer rental discounts of up to 50% for one month to tenants, as spending at shuttered malls recovered strongly as soon as they reopened. As such, the impact is limited to the loss of revenue during the closure periods—14 days for Lardprao, 18 days for Pinklao and 30-45 days for Ramindra (still closed). In addition, given the better-than-expected spending recovery, advertising and promotional expenses should be lower than we earlier anticipated. We have, therefore, upgraded our FY11 earnings forecast 8% to Bt1.87bn.
New projects to be announced early next year: CPN has already secured four land plots for future developments, one of which is likely to be in Bangkok. The details of these new projects should be disclosed early next year, which we view as a future share price catalyst. The announcement will prompt a flow of upgrades to projections and valuations as the projects are factored into models.
Asset monetization underway: CPN will choose one of the following three bundles of assets to spin off to a property fund by 2Q12: 1) retail space at Central Chiangmai or 2) hotels at Pattaya Beach and the Udonthani property or 3) the office tower at Central World. Shopping malls would go to CPNRF, while non-core assets (hotels and office tower) may be sold to either a new fund or to an existing listed property fund. Each asset bundle is worth about Bt5bn. Post-sale, net gearing will temporarily drop below 1.0x (from 1.2x at end-Sept), then will increase again given CPN’s huge CAPEX plans. As such, the asset bundles not sold in 2012 are likely to be spun off in 2013 or 2014. Note that we have yet to factor any asset spin-offs into our model.