Central Pattana

BUY

Central Pattana Plc (CPN)

Investment thesis

We have upgraded our CPN rating to BUY from HOLD, as its improved long-term growth profile and eased trading liquidity risk have pushed up our DCF valuation and increased the upside gap back up to an attractive level. The current high FY13 PER of 40x should not be an issue, in our view, as it will dive to only 23x, due to a massive gain from the spinning off of assets.

Par spit and capital increase

CPN's board yesterday approved a par spit of 1:1 and the issuance of up to 130.4m new shares following the par split. The new shares will be offered to institutional investors and/or specific investors under private placements. Note that Central Group and the Chirathivat family will not subscribe to the new shares. CPN should receive Bt5.2-6.5bn from the cash call (based on a PP price of Bt40-50 post-par split), which it will use it to finance projects in addition to the plan of 3-4 malls a year. The share dilution will be only 2.9%, but EPS dilution should be less and only a short-term phenomenon, as the return from the additional projects will soon cover it. There might even be EPS accretion if the additional projects are tied to acquisitions.

We think about mega malls

Management has yet to disclose the details of the additional projects, save to say that they will be mostly located in greater Bangkok and will open by YE15. They might be very large developments, probably of a similar format to the recently-announced Central Westgate in the Bangyai area, otherwise there wouldn't have been any need for a cash call. Funds from the capital increase of Bt5.2-6.5bn, which could gear up to Bt10-13bn, based on a D/E ratio of 1x, should be enough to finance up to two mega malls.

Spin-off plan still underway

Despite the upcoming cash injection from the PP, the plan to spin off Central Chiangmai and Ram Indra to CPNRF remains in place, but has been delayed somewhat to late 3Q13 or early 4Q13. CPN still needs to monetize assets in order to finance huge CAPEX of Bt14-15bn/year in FY13-14 and around Bt10bn in FY15 (excluding the additional projects). We estimate a spin-off gain of about Bt3.8bn to be booked in either 3Q13 or 4Q13.

Value accretion through par split and capital increase

The par spilt should technically increase trading liquidity, easing liquidity risk and WACC. Moreover, not only will the cash call through the PP increase liquidity further, but it will help CPN move more aggressively on expansion, which would level up its growth profile. We now think our post-FY20 terminal growth assumption of 3% is too conservative, as CPN’s expansion looks set to be faster and continue for longer than we previously assumed. We have, thus, increased our terminal growth rate to 4% and reduced WACC from 8.8% to 8.4%, due to eased liquidity risk. As a result, our YE13 target price rises to Bt118 from Bt84.50.