Phoenix Mills: One up on High Street. Initiate with OW:: JPMorgan

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Phoenix Mills
Overweight
PHOE.BO, PHNX IN
One up on High Street. Like the product... like the stock. Initiate with OW


• Initiate with OW and Mar-12 PT of Rs280: Phoenix Mills is a leading
and the only listed play on retail real estate in India. We believe the
company offers stability and near-term earnings growth via a combination
of high-quality retail-led mixed use developments which are completing
over the next 12 months. The portfolio has seen substantial pre-lease
commitments, which should translate into a steadily growing annuity
stream. This gives healthy visibility on our forecast rent growth of 57% over
FY10-13E, which should, in turn, be the prime driver of earnings CAGR of
61% during FY10-13E.


• Like the product, like the stock…: PML’s key asset “High Street
Phoenix” in South Mumbai (~45% of value) is one of the most successful
retail malls in India, which records footfalls of >1MM/month. The mall has
marked the maiden entry of a few marquee international retailers.
Improving retailer trends and management’s ability to leverage the High
Street Phoenix experience to other developments have seen leasing pick up
materially over the past two quarters. Most of the projects are anywhere
between 55% and 75% leased, implying high rent visibility. 2Q was the first
quarter in which PML saw contributions from revenue share starting to flow
in (~10% of base rent) and this provides additional revenue upside potential
in the near term.

• Drivers of the stock higher near term, in our view, will be: 1) further
improvement in pre-leasing within the portfolio; 2) opening of ShangriLa
hotel & market city projects over the next 6-12 months; 3) any evidence of
cap rate compression due to better-than-expected retail fundamentals.

• Valuation and PT: Our SOTP-based Mar-12 PT is Rs280 (WACC: 13%;
and cap rate: 11%), of which the HSP asset (income generating) accounts for
almost 45%, implying confidence on the numbers. While relative valuations
at FY12E P/E/P/B of 19.2x/1.7x may look expensive relative to local RE
developers, given PML’s pure retail focus, there is no direct comparable in
the local market. Comparing PML to CapitaMall Asia (Singapore)/other
emerging market players as well as Indian retailers, it is at a meaningful
discount, despite offering higher earnings growth. High execution/leasing
visibility on assets nearing completion lend reasonable comfort on PML’s
earnings estimates over the next two years.

• Key risks, in our view, relate to PML’s minority stakes in SPV’s developing
market city projects. This raises concerns about potential exits required by
private investors (Rs10B invested) once assets become operational (though
still it is two-three years away).