CPN Retail Growth Leasehold

CPN Retail Growth Leasehold
2Q14 net investment income of Bt681mn (+23% YoY and 21% QoQ), driven mainly
by the inclusion of CentralPlaza Chiangmai Airport in April. There were two factors
behind the YoY and QoQ growth. First was the addition of new assets that provided a
+22% YoY and +19% QoQ increase in rental and service income. We note that excluding
the new asset shows a slight fall of -1% YoY in income due to a drop in occupancy rate
at Rama III. Second was a slower rise in cost of rental and service (+8% YoY and +3%
QoQ) and fund expenses (+8% and +3% QoQ) due to CPN’s agreement to support
CPNRF’s operating expenses and fund management fees for the new assets for the
period April 2014-March 2018. Including unrealized gain/loss from investment of
Bt169mn, net increase in net assets was Bt851mn (+11% YoY, flat QoQ). It is paying an
interim DPU of Bt0.273 on 16 April-30 June 2014 operations, implying annualized yield
of 7.6%. To incorporate 2Q14, we have fine-tuned our 2014-2016F forecasts; though net
investment income in 1H14 of Bt1.3bn represents only 47% of our new 2014 forecast,
we expect it to meet forecast as the new asset will add to earnings in 2H14.
All assets doing well. At the end of June, the average occupancy rates for CPNRF’s
portfolio remained high at 96.7%, stable YoY and QoQ. CPNRF’s ability to raise rents on
expiring leases improved with the arrival of political calm, with the average rental
increase in 2Q14 at 6.1%, up from 5.9% in 1Q14 and 5.8% in 4Q13. Based on our
calculations, average rent rose to Bt1,318/sqm/mth in 2Q14, +4% YoY and +3% QoQ.
2H14 looking even better. We expect rental and services income to strengthen from
1H14, backed by: 1) revenue from CentralPlaza Chiangmai Airport; 2) the expiration of
17% of its portfolio in the second half, opening the way to raising rents on renewals;
and 3) a good chance of contract renewal with an anchor tenant in 3Q14. This will raise
occupancy rates at Rama III back to 99%. Further, a check with the property manager
shows traffic at CentralPlaza Chiangmai Airport has been rising steadily since the
beginning of the year and is now close to the level it was before the opening of
CentralFestival Chiangmai at the end of last year. Thus, we expect CPNRF to be able to
raise rents by 7% for expiring contracts as forecast. As of 2Q14, average rental increase
for expiring contracts for CentralPlaza Chiangmai Airport was up 7.3%.
Mid-2015 TP at Bt21/unit; maintain BUY. We have rolled over our TP to mid-2015
but our DCF-based TP remains unchanged at Bt21/unit. Although CPNRF unit prices
have increased by 10% over the last three months, CPNRF still provides an attractive
ETR of 30% and an attractive dividend yield of 7.4%. With IRR still high at 8.9% (based on
Aug 25 closing price), we like CPNRF the most of all property funds under our coverage
because of its excellent outlook and attractive yield.