REIT - Restarting The CMBS Market

The "catalysts for recovery include the following: a) normalisation in credit markets as systemic risks subside over time, and b) eventual reflation in Asian economies due to fiscal stimuli and growth in domestic consumption." Our anticipated scenario for recovery in the REIT sector has started to unfold.

Extending TALF loans to commercial mortgage-backed securities (CMBS). The Federal Reserve announced on 1 May that CMBS would become eligible collaterals for Term Asset-Backed Securities Loan Facility (TALF) starting Jun 09. TALF loans with five-year maturities will also be made available for purchases of CMBS, asset-backed securities (ABS) backed by student loans and small business loans. Up to US$100b of TALF loans could have five-year maturities, which are more suited for investors in CMBS. The CMBS market has rallied with yield for AAA-rated CMBS falling from 15% to 10%.

OVERWEIGHT REITs. The US Federal Reserve's decision to extend TALF loans for CMBS will restart the CMBS market, an important source of funding for REITs. Current yield spread for REITs is 4.7%, much higher than the historical average of 3.0%. We expect the yield spread to contract due to normalisation in the credit markets.

We like laggards such as Ascendas REIT (BUY/S$1.55/Target: S$1.93) and CDL Hospitality Trusts (BUY/S$0.755/Target: S$1.24). We also have BUY calls for Ascott Residence Trust (BUY/S$0.675/Target: S$0.90), Frasers Centrepoint Trust (BUY/S$0.80/Target: S$1.44) and K-REIT Asia (BUY/ S$0.89/Target: S$1.15). We have downgraded CapitaCommercial Trust (HOLD/S$1.12/Target: S$1.14) to HOLD as the stock has rallied 64.7% since 18 Mar 09.

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Parkway Holdings: Boosted by international operations

1Q09 net profit was up 9% YoY to S$21.3m, and revenue growth of 4% YoY to S$237.8m was in line with our estimates. Included in 1Q09 results was impairment loss of S$2.2m for its investment in Auric Pacific. Excluding exceptional items, net profit would have grown 20% for the first quarter. The growth in revenue was largely helped by its International operations (37% and 32% of 1Q09 and 1Q08 Group revenue, respectively), which grew by 20% YoY, thanks to healthy patient volumes.

Foreign patient volume at Singapore hospitals expected to remain low. Singapore visitor arrivals are expected to continue to decline, as the recession continues and the H1N1 virus deter discretionary travelling. This is likely to translate to lower foreign patient volume as patients put off seeking treatments in Singapore. If the H1N1 virus outbreak becomes more widespread, overall patient volumes (both local and foreign) could decline as patients avoid visiting healthcare establishments (e.g. radiology centres).

Maintain SELL. Management’s continual implementation of cost-cutting measures across all operations would help to cushion revenue impact from decline in patient volumes at its Singapore hospitals. The growth in its Singapore Healthcare segment (as more patients opt for outpatient treatment) and International operations are also expected to offset the decline in the Singapore Hospital segment. We are maintaining our earnings estimate of S$78.0m for FY09. Our target price of S$0.92 is based on 13x blended forward earnings. The stock is trading at 18x forward PE, which is unattractive compared with its peer average of 12x.

SIA - April loads factors show further improvement

With weak load factors a given in the current economic climate, Singapore Airlines’ (SIA) April’s numbers were better than expected. SIA showed resilience on both the passenger and cargo side. While YoY, both indicators slid by 4.2 pts and 3.7 pts respectively, passenger load factors at 72.2 were a sequential 2.8 pt improvement over April, while cargo load factors at 58.0 was flat.

On a YoY basis, passenger loads slid by 17.7%, but was an improvement over the 20% slide seen in March 2009. Cargo’s loads slid by 21.6%, versus an 18% decline in March. However, we are encouraged by SIA’s response to market conditions through capacity cuts. For April 2009, Passenger capacity was cut by 12.9%, while cargo was reduced by 16.5%. This level of reduction is ahead of assumptions.

While we warn that April’s load factors could be an anomaly rather than a trend, the signs are encouraging. Management’s recent indication that forward bookings are showing signs of leveling off are also cause for optimism, but we share management’s caution in its outlook. We also note that May’s passenger load numbers have a strong likelihood of being weak, which was during the height of the H1N1 flu virus scare.

We are maintaining our net FY10 profit forecast at S$865m. We expect SIA to remain profitable, despite lower revenues, due to reduced operating overheads, such as fuel and staff costs. We re-iterate our Buy call on SIA, with a target price of S$13.20, based on 1.1x book value.