Tuesday, 18 March 2014

Perennial China Retail Trust

CIMB Research, March 16

TRADING in both Catalist-listed St James Holdings (SJH) and Perennial China Retail Trust (PCRT) was halted on March 14 for the announcement of: 1) the reverse takeover of Perennial Real Estate Holdings Pte Ltd (PREH), including a 27 per cent 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.
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. 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 because: 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 - and 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 0.9 times NTA is expensive compared to Singapore developers at an average 0.74 times P/B.
We downgrade our rating to "reduce" from "hold" and cut our RNAV-based target price by 13 per cent to S$0.50, as we increase our discount rate from 20 per cent to 30 per cent.

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