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Central Pattana

Renewed pessimism over 1Q14 operation

Central Pattana Plc (CPN)

Investment thesis

CPN is one of the best long-term plays in the sector, we believe. Despite the hiccup at Central World (CW) as a result of the political rally, we still expect the firm to deliver strong core earnings growth of 16.7percent for FY14. However, the 10percent share price rally after protestors moved out from Ratchprasong intersection pushed up the FY14 PER to 29.3x, 0.5SD over CPN's long-term average, which isn't a good entry price for short-term traders. But for long-term investors who have followed our call, we recommend holding positions as the earnings growth profile is solid.

Minimal impact from 10-20% discounts at Central World

Road blocks from Jan 13 to March 2 as a result of the political rally will only minimally impact CPN's performance. The firm is likely to have offered 10-20% rental discounts to tenants at CW and free rent at newly-opened the Groove (a new 7,500sq.m lifestyle zone at CW) during the road block period. We estimate that the discount would squeeze FY14 profit by only 0.4%. But as we had modeled for a 10% discount for three months, our profit forecast is relatively unchanged.

Solid rental growth momentum

Despite slowing domestic consumption and the hiccup at CW, CPN reaffirms that same-store rental rates will increase by 5-6% in FY14 (we assume 4.9%). The firm said that in January it still achieved double-digit rental growth for contract renewals at its malls in first-tier cities and tourist destinations, while CW should swiftly regain shopping traffic.

10 new projects in FY14-16

CPN plans to open two new malls in FY14, three in FY15 and another five in FY16, which should expand its retail area by 5% in FY14, 10% in FY15 and 16% in FY16, a three-year space CAGR of 10%. Most projects should open on schedule. Only the I-City mall project in Malaysia, which is slated to open in late FY16, may be delayed, as CPN wants to make sure that the development really fits with local consumer behaviors and preferences. As such, the firm will conduct a further detailed market study, which may cause the project to be redesigned.

Asset spin-off on again

The planned spin-off of Central Plaza Chiangmai Airport to CPNRF now looks like it may be back on, as CPNRF's unit price has rebounded in recent weeks. The firm is likely to sell the asset at a yield below 7.6%, implying that CPNRF's unit price has to be higher than Bt16 (the close price yesterday was Bt15.70). However, CPN must spin off the asset by July (within one year of the SEC approving CPNRF's capital increase), otherwise it will have to consider establishing an REIT or converting CPNRF into an REIT, which would take another six months. We estimate a net gain of around Bt4-5bn from the spin-off.


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