CPN remains one of the best long-term plays in the sector, we believe. It has a sustained long-term growth profile, driven by aggressive expansion and increases to rental rates, even in the current weak consumption environment. Our BUY rating stands with a YE14 target price of Bt50.
Maintaining long-term growth targets
Mr Preecha Ekkunagul, the new CEO of CPN (formerly CEO of ROBINS), addressed an analyst meeting last Friday. The firm still targets a revenue CAGR of 15% and plans to open at least three new malls a year. CPN has identified about 20 areas where it plans to build new shopping centers within the next five years. Preecha said that besides expansion, he will focus on existing assets. He believes there is room to the increase yields of existing malls. His initiative, if successful, would enhance ROA and push up growth in excess of our model.
Balance sheet remains healthy even in absence of asset spin-off
Ms Naparat Sriwanvit, the new CFO, said that annual CAPEX will rise to Bt15-16bn from Bt11-13bn, due to more aggressive expansion. Around Bt10bn will come from internal cash, the remainder from debt and asset monetization. CPN intends to spin off Central Plaza Chiangmai Airport to CPNRF by June 2014. The firm is probably waiting for the unit price of CPNRF to be sustained above Bt16 in order to sell the asset at a price of not less than its appraised value.
If CPN can’t spin off the asset by June 2014 (within one year of the SEC approving CPNRF’s capital increase), it would have to consider establishing an REIT or converting CPNRF into an REIT, which would take another six months. A delayed spin-off date wouldn’t affect the expansion plan, as the balance sheet would still be healthy. Net gearing was only 0.49x at YE13 and should peak at 0.65x in FY16 (without any assets spun off)—far below the creditor covenant of 1.75x.
Strong rental growth momentum
Management reaffirms that same-store rental rates will increase by 5-6% in FY14 (we conservatively assume 4.6% in our model). Major contract renewals at the Chiangrai, Pitsanulok, Lardprao and Rama IX malls will be the rental growth drivers this year, while the conversion of long-term lease contracts of 23,000sq.m (2% of the retail portfolio), mainly at the Pinklao mall, to short-term rents upon contract expiries next year will be the driver for FY15. Note that at Pinklao, CPN has booked non-cash revenue from long-term lease contracts on a straight line basis at a rate of around 6x below the average market rate.