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Phoenix Mills (PHOE.BO)
Timely Execution of Market Cities: The Key to Re-Rating
HSP, a cash cow, provides strong valuation support — A high-yielding
asset - High Street Phoenix (HSP) Mall in Lower Parel, which is ~55% of
NAV, makes Phoenix Mills a differentiated and defensive play unlike its
peers, whose developmental portfolios largely dominate (60-85%) their NAVs
and thereby increase their risk profiles.
New Base NAV of Rs 317 (vs Rs 355) and reduce TP to Rs 260 — Based
on our meeting with management, channel checks/news flow, we have made
the following changes: 1) Increased market cities discount by 5%; 2) built in
delays of 6-9 months in mall launches and 1-2 years for hotels across market
cities; 3) further delayed occupancy growth in new malls; 4) value Ph-IV of
HSP on balance FSI left for development vs acreage of the plot, as newsflow
suggests that parking FSI looks unlikely; 5) updated avg rentals and revenue
share for HSP based on last 9-months’ performance; 6) roll forward NAV to
Dec-11; 7) increase cost of capital for development business to 14% (vs
13%). The stock trades at ~40% disc to NAV; we maintain our Buy.
Key drivers — 1) Likely NAV upsides from revenue sharing models at malls;
2) increased FSI in HSP Ph-IV; 3) successful timely opening of market cities
in next 6-8 months; 4) EWDPL IPO to unlock value if/when it comes through;
and 5) income from newly carved-out Mall management services business.
Challenges/Risks — Execution delay and slow leasing in some ‘Market City’
projects is a risk for the company. Other risks include: a) regulatory risks on
FSI//parking; b) further delays in the hotel project; and c) a slow down in
economy and retail momentum.
Quants View − Unattractive
Phoenix Mills currently lies in the Unattractive quadrant of our Value-
Momentum map with weak momentum and weak value scores. The stock has
moved from the Glamour quadrant to the Unattractive quadrant in the past
three months, indicating a fall in momentum along with valuations remaining
weak. Compared to its peers in the Real Estate sector, Phoenix Mills fares
worse on the valuation metric and on the momentum metric. Similarly,
compared to its peers in its home market of India, Phoenix Mills fares worse on
the valuation metric and on the momentum metric.
From a macro perspective, Phoenix Mills is likely to benefit from small cap
outperformance, tightening Asian interest rates, falling EM yields, a weaker US
dollar, and a weaker yen.
Phoenix Mills
Valuation
Our target price of Rs260 is at an 18% discount to our Dec-11 NAV of Rs317.
This is based on a combination of rental yield for HSP and NAV-method for
under-development assets. The lower discount (vs. 20-30% ascribed to tier-II
peers) is a combination of: 1) strong rental annuity and de-leveraged balance
sheet; 2) near-term execution visibility of Market Cities; and 3) likely delays for
EWPDL, BARE and hospitality projects. Our NAV estimate of Rs317 is based
on the following assumptions: 1) Rs171 per share for High Street Phoenix using
a rental yield model with ~10% cap-rate, 4% terminal growth; and Phase IV
land (~1.5acres) valued basis recent mill land transactions; 2) 3.8 msf
economic interest in Market City projects (ex-hotels); 3) 5.1 msf economic
interest in EWPDL & BARE project; and 4) Rs15-18mn capital cost per room for
~1,000 rooms following its 75% stake in the hospitality venture. This apart, we
factor in: a) total consolidated debt of ~Rs7.1bn adjusted for Rs1.8bn of cash;
b) cost of capital of 14.2% (assuming 12% cost of debt); and c) a tax rate of
30%.
Risks
We rate Phoenix Mills Medium Risk. Our key reasons are: 1) Relatively stable
and healthy cash flows with near-term visibility; 2) strong asset portfolio of
strategically located land parcels, fully paid for; and 3) de-risked business
model and de-leveraged balance sheet. However, the main downside risks to
our investment thesis and target price include: 1) concentration in the retail and
hospitality segment, which is still in the recovery phase post downturn; 2) any
leasing/footfall disappointment on the launch of forthcoming projects will likely
prove detrimental to the company's reputation built on HSP and our valuation
assumptions; 3) relationships with strategic investors are critical as they have
an impact on the liquidity and execution plans of PML and hence on our
valuations; 4) a rapidly changing property market environment could lead to
property price-demand risks, regulatory risks and potential supply risks. This
differs from the Low Risk rating assigned by our quantitative risk rating system
(which measures the stock's volatility over a 260-day period)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Phoenix Mills (PHOE.BO)
Timely Execution of Market Cities: The Key to Re-Rating
HSP, a cash cow, provides strong valuation support — A high-yielding
asset - High Street Phoenix (HSP) Mall in Lower Parel, which is ~55% of
NAV, makes Phoenix Mills a differentiated and defensive play unlike its
peers, whose developmental portfolios largely dominate (60-85%) their NAVs
and thereby increase their risk profiles.
New Base NAV of Rs 317 (vs Rs 355) and reduce TP to Rs 260 — Based
on our meeting with management, channel checks/news flow, we have made
the following changes: 1) Increased market cities discount by 5%; 2) built in
delays of 6-9 months in mall launches and 1-2 years for hotels across market
cities; 3) further delayed occupancy growth in new malls; 4) value Ph-IV of
HSP on balance FSI left for development vs acreage of the plot, as newsflow
suggests that parking FSI looks unlikely; 5) updated avg rentals and revenue
share for HSP based on last 9-months’ performance; 6) roll forward NAV to
Dec-11; 7) increase cost of capital for development business to 14% (vs
13%). The stock trades at ~40% disc to NAV; we maintain our Buy.
Key drivers — 1) Likely NAV upsides from revenue sharing models at malls;
2) increased FSI in HSP Ph-IV; 3) successful timely opening of market cities
in next 6-8 months; 4) EWDPL IPO to unlock value if/when it comes through;
and 5) income from newly carved-out Mall management services business.
Challenges/Risks — Execution delay and slow leasing in some ‘Market City’
projects is a risk for the company. Other risks include: a) regulatory risks on
FSI//parking; b) further delays in the hotel project; and c) a slow down in
economy and retail momentum.
Quants View − Unattractive
Phoenix Mills currently lies in the Unattractive quadrant of our Value-
Momentum map with weak momentum and weak value scores. The stock has
moved from the Glamour quadrant to the Unattractive quadrant in the past
three months, indicating a fall in momentum along with valuations remaining
weak. Compared to its peers in the Real Estate sector, Phoenix Mills fares
worse on the valuation metric and on the momentum metric. Similarly,
compared to its peers in its home market of India, Phoenix Mills fares worse on
the valuation metric and on the momentum metric.
From a macro perspective, Phoenix Mills is likely to benefit from small cap
outperformance, tightening Asian interest rates, falling EM yields, a weaker US
dollar, and a weaker yen.
Phoenix Mills
Valuation
Our target price of Rs260 is at an 18% discount to our Dec-11 NAV of Rs317.
This is based on a combination of rental yield for HSP and NAV-method for
under-development assets. The lower discount (vs. 20-30% ascribed to tier-II
peers) is a combination of: 1) strong rental annuity and de-leveraged balance
sheet; 2) near-term execution visibility of Market Cities; and 3) likely delays for
EWPDL, BARE and hospitality projects. Our NAV estimate of Rs317 is based
on the following assumptions: 1) Rs171 per share for High Street Phoenix using
a rental yield model with ~10% cap-rate, 4% terminal growth; and Phase IV
land (~1.5acres) valued basis recent mill land transactions; 2) 3.8 msf
economic interest in Market City projects (ex-hotels); 3) 5.1 msf economic
interest in EWPDL & BARE project; and 4) Rs15-18mn capital cost per room for
~1,000 rooms following its 75% stake in the hospitality venture. This apart, we
factor in: a) total consolidated debt of ~Rs7.1bn adjusted for Rs1.8bn of cash;
b) cost of capital of 14.2% (assuming 12% cost of debt); and c) a tax rate of
30%.
Risks
We rate Phoenix Mills Medium Risk. Our key reasons are: 1) Relatively stable
and healthy cash flows with near-term visibility; 2) strong asset portfolio of
strategically located land parcels, fully paid for; and 3) de-risked business
model and de-leveraged balance sheet. However, the main downside risks to
our investment thesis and target price include: 1) concentration in the retail and
hospitality segment, which is still in the recovery phase post downturn; 2) any
leasing/footfall disappointment on the launch of forthcoming projects will likely
prove detrimental to the company's reputation built on HSP and our valuation
assumptions; 3) relationships with strategic investors are critical as they have
an impact on the liquidity and execution plans of PML and hence on our
valuations; 4) a rapidly changing property market environment could lead to
property price-demand risks, regulatory risks and potential supply risks. This
differs from the Low Risk rating assigned by our quantitative risk rating system
(which measures the stock's volatility over a 260-day period)
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