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Central Pattana (CPN TB) Summary

Core Content

Central Pattana (CPN) is a leading retail property developer in Thailand with a 20% market share in the Bangkok Metropolitan Area (BMA). The company is managed by the Central Group, a major player in retail and restaurant operations, which provides strong synergy and support. CPN manages 24 shopping malls with a total net leasable area (NLA) of 1,166,974 sq.m. and plans to expand to 1.5m sq.m. by 2016, representing a 30% increase in NLA.

The share price is currently THB48.00, with a target price of THB60.00, implying a 26% upside. The target price is based on a DCF model with a WACC of 8.8% and a terminal growth rate of 5%, resulting in a 32.7x PE and 5.8x PBV in FY15. This valuation is considered high but justified by CPN's superior performance compared to regional peers.

Main Points

• Market Position:

  • Leading retail property developer in Thailand.
  • 20% market share in BMA.
  • 55% stake by the Chirathivat family and Central Group.

• Financial Performance:

  • Revenue and EBITDA are expected to grow significantly.
  • Core net profit is projected to increase by 18% YoY in FY15.
  • Core EPS is forecasted to rise from THB1.40 in FY13 to THB2.16 in FY16.
  • Net dividend yield is expected to increase from 1.0% in FY12A to 1.8% in FY16E.

• Valuation:

  • Target price of THB60.00 is based on DCF analysis.
  • Implies 32.7x PE and 5.8x PBV for FY15.
  • Current PE is 31.1x, which is higher than regional peers (20.6x).

• Growth Drivers:

  • Annual rental increases of 5%.
  • Expansion of 9 new malls by 2016, increasing NLA by 30%.
  • Strong recurring income from 24 successful malls.

• Rental Structure:

  • 49% fixed rent.
  • 29% percentage of sales.
  • 22% long-term fixed rent.
  • About 70% of rental income is fixed, making it more resilient during economic downturns.

• Occupancy Rate:

  • Maintained at 95%-98% over the past seven years.
  • Expected to remain at 96% in FY14-17.
  • High occupancy rate supports consistent income and future growth.

• Business Model:

  • Integrated with Central Group, enhancing tenant attraction and traffic.
  • Strong execution record and no funding concerns.
  • Utilizes REIT as a financing vehicle to enhance financial flexibility.

• Peer Comparison:

  • No direct domestic peer due to different business models.
  • Siam Future (SF) is the only listed peer, but its strategy and accounting practices differ significantly.

• Industry Analysis:

  • Occupancy rates in BMA remain strong despite political unrest.
  • Total retail space in BMA is expected to increase to 7.13m sq.m. by end of 2014.
  • Other players are also expanding and renovating their malls.

• Risk Factors:

  • Political risk, especially in Bangkok where political unrest has affected malls.
  • Weak macroeconomic conditions could impact consumer spending.
  • Financial market risk due to high interest rates and stock market conditions.

• Corporate Strategy:

  • Focused on local expansion, with new projects split between BMA and provincial areas.
  • Exploring opportunities in Malaysia, Indonesia, and Vietnam through joint ventures.

• Financial Highlights:

  • Revenue breakdown: 83% from retail, 2% from offices, 4% from food & beverage, 4% from hotels, 2% from management fees, and 5% from other income.
  • Cost breakdown: 89% from retail, 44% from staff SG&A, 18% from advertising & promotion.
  • Balance sheet is solid with an internal D/E target of 1.0x.
  • Debt is largely fixed rate (89%), reducing interest rate risk.

Key Information

• Share Price: THB48.00
• Target Price: THB60.00 (+26% upside)
• Market Cap (USD): 6.6B
• ADTV (USD): 6M
• 3-Year Earnings CAGR (2014-2017): 20%
• Rental Growth: 5-7% pa during 2014-16
• Occupancy Rate: 96% in FY14-17
• ROE: 19.5% in FY15 (highest in the region)
• Dividend Yield: 1.8% in FY16E
• Debt Structure: 89% fixed rate, 11% floating rate
• Financing Cost: Average financing cost is trending down to 4.0% in 1Q14
• Recurring Income: Strong base from existing 24 malls and expansion plans
• Expansion Plan: 9 new malls by 2016, with 30% NLA increase

Investment Thesis

• CPN is initiated with a BUY rating and a Street-high target price of THB60.00.
• The high target price is justified by its superior ROE and earnings growth.
• Strong synergy with Central Group supports tenant attraction and rental growth.
• Proven execution record and financial flexibility enhance growth potential.
• The company is expected to maintain high occupancy and rental growth despite macroeconomic challenges.

Conclusion

Central Pattana is a well-positioned retail property developer in Thailand, with a strong financial model, proven execution, and a clear expansion plan. Its high proportion of fixed rental contracts and strong ties to the Central Group make it more resilient to economic fluctuations. The company's target price is based on a DCF model, reflecting its strong growth prospects and valuation premium. Despite some risks, including political and macroeconomic factors, CPN's fundamentals remain strong, supporting its potential for continued growth and re-rating.