Central Pattana

Central Pattana Plc (CPN)

Investment thesis: CPN is our top pick in Thai Consumer space and remains one of the best long-term growth plays under our coverage. Its expansion story is clear to see, while its valuation is very attractive. It is the only Thai Consumer stock that trades on a par with its five-year average PER; the sector is 2SDs above its mean. We have rolled over our investment horizon to YE13 and arrived at a new DCF target price of Bt74 up from Bt63 for YE12. Our conviction BUY call stands.
Trading on a discount to CPNRF: Although CPN trades at a 17% premium to its current NAV, it still looks really cheap compared to CPNRF, which trades at a 50% premium to its NAV. CPN has a much stronger growth profile and perpetual life, so deserves at least the same premium, we believe.
Double-digit LFL rental growth continues into 2H12: After marking its best-ever LFL rental growth of 15.2% in 2Q12, CPN should continue delivering impressive rental growth of 12.2% in 2H12. Although LFL rental growth has peaked, we still expect it to remain strong at 6-7% through FY13-14 before resuming double digits in FY15, led by major contract renewals and the expiry of long-term leases.
Upside from new store announcements: The seven undisclosed projects should bring major upside to our valuation. We anticipate that early next year, CPN will announce four new projects to open in FY14 (the remaining three at some later stage). We roughly estimate that these seven undisclosed projects could add around Bt12/share to the current NAV.
Short-term story colored by spin-off gains: CPN is in the process of subleasing Central World Office to CPNCG for 20 years. We expect it to book net after-tax gains of Bt1.45bn (the first tranche) in 3Q12 and Bt124m (the second tranche) in 4Q12. After asset monetization, CPN’s net gearing would fall to 0.95x at YE12 against 1.13x in the case of no asset spin-offs.
Another issue that cannot be ignored: Insurance payouts for the May 2010 fire damage at Central World would have a material impact on earnings and valuation. The claims total about Bt3.3bn. Once received, the payouts should be booked as gains, as the damage was written off in FY10. Cash received would instantly increase CPN’s NAV by Bt1.2/share.

Outlook
Double-digit LFL rental growth continues into 2H12: After marking its best-ever LFL (like-for-like) rental growth of 15.2% for 2Q12, we expect CPN to continue delivering impressive rental growth of 12.2% in 2H12, which should set up FY12 LFL rental growth for a record of 12.6%. The three major drivers of 2H12 LFL rental growth are as follow:

1) Smaller rental discounts and high rental growth at Central World: The average rental discount at Central World (17% of CPN’s total net leasable area [NLA]) has diminished from 15% FY11 to 5% since 1Q12. For tenants that no longer receive discounts, such as restaurants and banks, CPN is charging higher rents. The average rental rate at Central World, thus, jumped 20% YoY in 1H12.

Momentum should be sustained into 2H12.
2) Re-basing of rental rates in Chiangmai and Udonthani: Chiangmai (6.9% of total NLA) is regarded as the best and most popular shopping complex in Northern Thailand. Traffic to the mall is heavy and spending there is impressively high. However, the average rental rate was too low. It ranked behind many of CPN’s new provincial malls, which are less popular and where spending is lower. As such, since late FY10, CPN has increased rental rates as contracts came up for renewal, boosting the average rate by 15% YoY in FY11 and 16% YoY in 1H12. With regard to Udonthani, on completion of renovation and expansion in April, its NLA jumped 36% to 69K sq.m (6.3% of total NLA) and the rental rate shot up 45% YoY, which would put it in line with other CPN provincial malls.
3) Major contract renewals at four malls opened in late FY08 till FY09: After renewing three-year contracts, the average rental rate at Pattaya Beach (5.2% of total NLA) increased 15%, while the average rates at Chaengwattana (5.9% of total NLA) and Chonburi (3.7% of total NLA) both rose by 10%. We expect the average rent at Khonkaen (4.6% of total NLA), which is due for a major contract renewal in December 2012, to increase by 10-15%.
Coming off the peak but still strong: During FY13-14, despite the absence of major contract renewals or re-basing effects, we still anticipate that the LFL rental rate will increase by 6-7%—above the normal growth rate of 5%—as we see some scope for rental rates at Central World, Chaengwattana and Rattanathibet to grow at rates that exceed the average for the portfolio. With regard to Central World, although its mean rental rate jumped 20% YoY in 1H12, it still ranks only third in the portfolio, behind Lardprao and Pinklao, while its location is arguably the best prime plot in Bangkok (and without doubt, in CPN's portfolio). Furthermore, Chaengwattana’s rental rate is 11% below that of Rama II, while Rattanathibet’s is 26% lower, even though the two locations’ spending and pedestrian traffic are comparable with Rama II.

Another strong jump in FY15: Double-digit LFL rental growth may manifest again in FY15, driven by major contract renewals at Pitsanulok (2.3% of total NLA) and Rama IX (4.8% of total NLA, excluding long-term lease space to ROBINS) in 4Q14. We expect a big jump in rental rates as contract come up for renewal, thanks to strong demand for rent at the two shopping malls. Their respective spaces have been full since opening and there are long waiting lists of aspiring tenants.
Moreover, the expiry of long-term lease contracts for 20K sq.m (2% of total NLA) at Pinklao and Central World should considerably boost their respective average rates, even though the space seems small. CPN currently books non-cash revenue from long-term lease space at Pinklao on a straight-line basis over the lease term at a rate of 3-4 times below the market rate, while long-term leased spaces at Central World won’t contribute income to CPN until after lease expiry. After expiry, the firm aims to change the contracts to either three-year fixed rents or revenue-sharing regimes

Upside from new store announcements: CPN has greater scope for upside from expansion than do retailers. It plans to open 12 new shopping malls during FY12-15, which would take its portfolio to 30 locations by YE15. However, we have included only five new stores in our valuation, as the details and locations of the remaining seven malls have not been disclosed yet. We anticipate that early next year, CPN will announce four new projects to open in FY14, two of which are likely to be located in suburban Bangkok, where the firm has already bought land and demand for retail space to rent is strong.

Seven undisclosed projects would add another Bt12/share: To gauge the potential impact of the seven undisclosed projects on our valuation, we assume that two properties will be in suburban Bangkok, the remainder in the provinces, Note that we do not expect the super-sized Lumpini project to open by YE15, as the development of this property is likely to take around three years and the Crown Property Bureau still hasn’t transferred the land (and it’s not clear when it will). Assuming NLA of 60K sq.m for the suburban Bangkok malls and 25K sq.m for provincial stores, we roughly estimate that these undisclosed projects would add about Bt12/share to current NAV.

Short-term story colored by spin-off gains: CPN is in the process of subleasing Central World Office to CPN Commercial Growth Leasehold Property Fund (CPNCG) for a 20-year term. The average appraised value by two independent appraisers is Bt4.36bn, but the transaction price is likely to be about Bt4.7bn. The property is divided into two tranches. The first tranche will be funded by unitholders—Bt4.39bn (426m units at a price of Bt10.30 apiece); the subscription period runs Sept 4-10. The second tranche of Bt370m will be financed by bank debt; the transaction will take place in October, by which time the property fund would have already have been established. CPN will hold 25% of CPNCG. We estimate that CPN will book net after-tax gains of Bt1.45bn for 3Q12 and Bt124m for 4Q12.

Recommendation and valuation
Target price raised to Bt74: We have rolled over our investment horizon to YE13 and arrived at a new DCF target price of Bt74, up from Bt63 for YE12. Our new target price implies an FY13 PER of 31.8x (1.05SDs above its 5-year average), which we believe is justifiable for a company at the beginning of an investment cycle.