Central Pattana

CPN remains on our top BUY list in Thai Consumer space, thanks to its superior profit growth profile and attractive valuation. We expect the firm to deliver core earnings expansion of 28% YoY in 2H14 versus a sector average of 18% YoY. Its current PERs of 29.3x for FY14 and 25.4x for FY15 are in line with its historical averages and are far cheaper than its peer means of 34.6x and 27.2x. We have rolled over our investment horizon to YE15 and have a new target price of Bt63 (Bt55 for YE14).

Recovery outperforming other Consumer stocks

Spending in CPN’s shopping malls has clearly recovered and the recovery looks to be stronger than that at any retail store brand under our coverage. Most of the shoppers at its malls are in mid- to high-income demographics, where spending power remains solid. CPN said that its tenants’ sales have recovered strongly since July. Sales of fashion shops turned around from a contraction in 1H14 to growth of around 3-5% since July, while restaurant sales have accelerated from low single digits in 1H14 to high single digits since July. 

Same-store rental growth reversing to accelerated trend

The improving spending will mean both higher income from tenancy contracts with revenue components (22% of rental revenue) and enable rate increases on renewals of fixed-rent contracts (75% of rental revenue). As such, same-store rental growth should exceed 4.4% in 1H14 and the target of 5% growth for this year looks achievable.

We expect same-store rental growth to accelerate further in FY15, underpinned by: 1) the full-year impact of major contract renewals at Lardprao and Rama IX in 2H14 and 2) the low base at Central World (CW). Our model assumes that rental rates at Lardprao and Rama IX will both rise by at least 7%, while CW should see swift growth in FY15 from the low base set by 25-30% rental discounts offered to tenants during 2M14 and weak retail sales from low tourist numbers this year. Note that revenue-sharing contracts at CW comprise about 26% of the mall’s revenue and tourists account for 40-50% of its foot traffic.

Solid cash flows may obviate need for spin-offs

CPN reaffirms that it will open three malls in FY15 and another four in FY16, which will increase total retail NLA by 10% in FY15 and by 11% in FY16. Despite high CAPEX of Bt16bn per annum, the balance sheet should remain healthy, thanks to strong EBITDA of Bt12.9bn in FY14, Bt14.6bn in FY15 and Bt17.6bn in FY16. The net debt/EBITDA ratio will range only 1.2-1.3x during FY14-16, which implies that if CPN were to stop expansion, it would post a net-cash position within two years. At this point, we don’t think the firm will need to spin off assets again unless it expands more aggressively and/or decides to acquire shopping malls (under that scenario, the targets would probably be in ASEAN countries).