Central Pattana

Central Pattana Plc (CPN) 

Investment thesis

Messages from management at an analyst meeting yesterday reaffirmed our belief that CPN is one of the best long-term plays on the SET. Although same-store rental growth is expected to slow in the short term due to weak domestic consumption, CPN should still be able to deliver three-year earnings CAGR of 17.4% on the back of its continued expansion. Valuation is also compelling with an FY15 PER of 22.9x, 0.5SD below the long-term average. We maintain our BUY call with a YE15 target price of Bt57. 

What's new?

CPN will sublease Central Festival Phuket phase 1 (CFP1), excluding the department store, from Central Department Store (CDS) for 41 years at a total investment value of Bt6.4bn. CFP1 has a net leasable area (NLA) of 44,347sq.m and the average short-term rental rate is Bt1,379/sq.m/month, ranking seventh in CPN’s portfolio. If shareholders approve the deal at the 2015 AGM on April 24, the transaction will occur in June. CPN will then make minor renovations with a budget of Bt300m to bring the mall up to its standard. The budget may be increased to Bt1bn if new rental space is added. CPN expects to complete the facelift in September 2017 at the same time as Central Festival Phuket Phase 2 (CFP2) opens. Recall that CPN has subleased 55 rai of land opposite CFP1 from CDS since March 2014, to develop CFP2, which will have an NLA of around 60-70k sq.m.

Reasons for acquisition plan

Besides enhancing its long-term growth profile, the acquisition will remove CPN’s conflict of interest. CPN had planned to build only CFP2 and CDS would hire CPN to manage CFP1 in order to engender smooth operations across the whole complex. However, there would be a problem if CPN wanted to relocate tenants from CFP1 to CFP2 to balance traffic and align the centers with their concepts and market positioning strategy. Note that CFP1 is positioned to capture mass consumers and families, while CFP2 aims to appeal more to luxury and lifestyle shoppers.

Real benefit to start in 4Q17

We expect the deal will have only a small impact on CPN’s earnings in the short term as revenue from the project will be squared with amortization and interest expenses. Real benefit should be seen after September 2017 at which time the renovation of CFP1 is completed and CFP2 opens.

Eyes on same-store revenue growth of 5%

A discount may continue at some malls as overall spending has remained weak, management said. However, the average discount should not be as high as the 3% discount given to tenants in 4Q14. CPN remained confident that it would achieve its same-store revenue growth target of 5% in FY15, which is higher than 2.5% growth assumed in our model.