I have also reviewed cimb Sell call issued today - its factually wrong on many fronts. Cma trades at 0.94x p/b (BV $1.84) not 0.87x. Newco shares issued at 0.8x p/b not 0.9x. Lastly PCRT shares should be viewed as a swap and no longer on its own merit hence PCRT p/b is irrelevant consideration. Moreover, report also failed to mention the challenges facing PCRT post rental guarantees.
http://infopub.sgx.com/FileOpen/eAnnc_CM...eID=274401
The following is CIMB Sell call on PCRT issued today.
CIMB: Perennial China Retail Trust |PDF
Is it worth the wait?
PCRT SP /PCRT.SI| REDUCE - Downgrade | S$0.55 - TP:S$0.50
Mkt.Cap: US$493.40m | Avg.Daily Vol: US$0.41m | Free Float: 44.00%
REIT| Author(s): Xuan TAN +65 6210 8698, Donald CHUA
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▊ If St James’ reverse takeover of Perennial goes through, PCRT’s shareholders will be offered an option to swap their shares for those of a bigger real estate company with presence in Singapore and China. We do not like the deal as: 1) investors will probably have to compromise on yield; 2) investors will gain access to a portfolio with higher gearing and proportion of assets under development, thus higher risk, in our view; and 3) while we believe the S$0.70 offer price is fair, the issue price of PREHL at 0.9x NTA is expensive compared to Singapore developers at an average 0.74x P/BV. We downgrade our rating to Reduce from Hold and cut our RNAV-based target price by 13% as we increase our discount rate from 20% to 30%.
What Happened
Trading in both Catalist-listed St James Holdings (SJH) and PCRT was halted on 14 Mar for the announcement of: 1) the reverse takeover of Perennial Real Estate Holdings Pte Ltd (PREH) (incl. 27% stake in PCRT), after which SJH will be renamed Perennial Real Estate Holdings Ltd (PREHL) and transformed into a real estate owner, developer and manager in Singapore and China, and 2) voluntary conditional offer of S$0.70/unit for PCRT in exchange for PREHL shares issued at S$1.1756/share, conditional upon the completion of (1) above.
What We Think
Rationale. We believe the rationale of the proposed acquisition and offer is to gain better access to funding. Also, the consolidation of PREH and PCRT’s assets positions the company as a mixed development developer and clears the confusion on whether PCRT should be regarded as a yield play. We view the deal negatively. While we believe the offer of S$0.70 at 1x RNAV and 0.9x P/BV is fair, payment in PREHL shares complicates the issue. The issue price of PREHL translates to 0.9x P/NTA and 24x P/E, pricey in our view. Existing shareholders converting into PREHL would compromise on yield, accept higher development risks, higher gearing and wait a much longer time for the portfolio to complete development. While investors can buy PCRT at 0.7x P/BV to be exchanged for PREHL shares at 0.9x P/NTA, we believe PREHL’s shares may de-rate to an average 0.74x P/BV as well. CMA is trading at 0.87x P/BV, but 75% of its assets are operational, while 77% of PREHL’s assets are under development.
What You Should Do
Reduce exposure on potential overhang post the announcement.