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Central Pattana

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Central Pattana Plc (CPN)

Investment thesis

Within Consumer space, CPN is the only firm trading at a forward PER that is below its historical mean (an FY14 PER of 23.9x; its mean is 25.7x). The discount might be due to expectations that rental rate growth may slow and the political chaos might hurt the performances of some of the firm's malls, particularly Central World. However, the current share price implies same-store rental growth of only 1%, which is too low in our view. With regard to the political situation, we view it as only a hiccup that won't impact on long-term fundamentals. If the share price were to fall this week, it would present a good opportunity to accumulate the stock at a cheap price. We maintain our BUY rating with a YE14 DCF-derived target price of Bt50.

Rental growth momentum continues

In this slowing economic climate, CPN looks a better deal than most retailers, as its rental rate continues to rise on conditions in contract agreements (some three-year contracts stipulate that the rental rate increases every year), while many retailers face sales declines. We expect the firm to deliver good same-store rental growth of 5.7percent for 4Q13, driven by substantial rent increases in 1H13 and tenant relocations with the opening of the H&M flagship store in Central World in late 3Q13. During the next four quarters, we anticipate rental growth of 5.0-5.5%. Central World and the new malls that opened in 2011-12 will be the drivers.

Expansion on-schedule

Although the consumption outlook is weak, CPN maintains its expansion plan unchanged. The company reaffirmed that it will open three new shopping malls in FY14, four in FY15 and five in FY16. The economic slowdown, on the bright side, will make it easier for CPN to expand. It should open opportunities to buy land at cheaper prices and will discourage the market entry of new players or small-capital developers.

Delayed asset monetization would have only insignificant impact

Prevailing weak market sentiment and the current low unit price of CPN's property fund, CPNRF, will probably cause management to postpone increasing the capital of CPNRF. As such, at this time there appears to be little likelihood of spin-offs. Assets to be spun off will have to be reappraised in compliance with SEC regulations, while unit holder approval to increase CPNRF's capital remains effective through to July 2014. However, delays to asset monetization wouldn't affect CPN's investment plans, as it could use debt financing. Even factoring in CAPEX for all undisclosed projects, net gearing would peak at only 0.53x—far below the firm's policy ceiling of 1.0x.

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