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UBS Investment Research
Phoenix Mills
S trong Qtr; Quality retail asset play
Event: Q1 beats UBS estimates; encouraging progress operationally
Standalone revenues and profits grew 16% YoY and 49% YoY respectively, ahead
of UBSe; QoQ growth was flat. Higher operating leverage at High Street Phoenix
(HSP), lower interest and higher other income drove this. Footfalls (1.4m per
month) were strong at HSP, good response on Pune mall launch, and launch timelines
of other malls intact. Further, it raised holding Bangalore mall to 46% (38%
earlier); and announced a 31% pay-out as dividend of Rs1.8/share for FY11.
Impact: Maintain our FY12E/13E on healthy retail consumption trends
This is on back of 1) growing HSP revenue sharing income, 2) rental re-negotiation
with anchors of 0.15msf in Phoenix, Mumbai; 3) new malls/hotel opening in FY12.
However, consolidation impact of new malls/hotel operational in FY12 may result
in some downside risk to our estimates and we await more details to factor the
same.
Action: Reiterate Buy; our top mid-cap pick in property
A quality retail asset portfolio at inflection point offering attractive return potential
on our target of Rs310. Key catalysts: 1) Ongoing rental revisions with anchors
(0.15msf) in HSP; 2) Successful/timely opening of Market City malls in Bangalore
(Sept’11), Kurla (Q3FY12) and Hotel Shangri-La (Q4FY12); 3) strong demand for
retail space with FDI opened up in retail and healthy retail consumption trends.
Valuation: Compelling at 50% disc to NAV
Target is at 25% disc to our NAV of Rs412. Valuations look compelling at: 1) a
50% disc to NAV, lower than Phoenix, Mumbai’s value of Rs218; and 2) 1.7x
P/BV—we see solid potential given rental annuity model & undervalued mall,
hotel assets.
Operationally doing well
Strong earnings from High Street Phoenix (HSP), Mumbai on 1) growing
revenue sharing contribution 2) new stores opened in 1Q were Wrangler, Lee,
Foodhall, Hidesign, Mobile Store, Seven East. Targeting EBITDA of 75% in
FY12 (vs. 71% in FY11). Await more clarity on timelines of 18,000sf
leasing, re-negotiation of 36,000ft with Big-Bazar; and 50,000sf with
Pantaloon – expect this to reflect in 4QFY12.
Market City malls progressing well —1) Pune launched in Jun’11, to see
scale-up in retailers opening (currently 30% operational, 85% leased); 2)
Bangalore (75% leased, targeting Sept’11 launch), Kurla (70% leased
targeting Q3 launch) and Hotel Shangri-La (operational in Dec’11) - we see
momentum pick-up; but have factored all assets to go live by Dec’11.
Chennai residential project has been soft-launched, a formal launch is
expected shortly – however the mgmt and channel checks suggest the initial
response from customers is encouraging.
On asset portfolio, the management continues to consolidate its stake in
Bangalore Market City – increased state from 37.8% to 46.4%. This is in line
with its strategy of consolidation, as opportunities arise.
Net debt has increased from Rs6.4bn in 4QFY11 to 7.9bn in 1QFY12, on
back of malls/hotel coming closure to launch timelines. However, don’t
foresee any interest/repayment worries with (D/E of 0.5x).
FY11 consolidated earnings varied from standalone primarily on
consolidation of 1) rentals from Lucknow mall (PML’s stake is 49%; mall
85% leased) of Rs 100-110mn and 2) sale of commercial premises at Pune of
Rs 170-180mn. Key variances: Revenues (consol.) Rs 2.1bn vs S/a Rs 1.7bn,
interest expense (consol) 227mn vs (standalone) 85mn.
Valuation compelling at 50% disc to NAV
Phoenix is differentiated by its unique rental annuity model. Its annuity (53% of
NAV) is a good valuation support. We believe a combination of a rental yield
model and NAV-based valuation methodology is most appropriate. Our price
target of Rs310 is based on a 25% discount to NAV of Rs412 factoring risks of
delays for its upcoming market city malls. We ascribe a lower discount to
Phoenix than to its Tier-II peers (30-35%) due to: 1) its strong rental annuity and
deleveraged balance sheet; 2) the near-term execution visibility.
Our NAV estimate of Rs412 is based on the following assumptions: 1) Rs218
per share for High Street Phoenix using a rental-yield model with a 9% cap-rate,
5% terminal growth; and Phase IV land (0.25msf) valued at Rs10,000/sf; 2) a
3.75msf economic interest in Market City projects (ex-hotels); 3) a 5.1msf
economic interest in EWPDL and BARE projects; and 4) Rs15-20m capital cost
per room for 1,000 rooms following its 75% stake in hospitality venture. This
apart, we have factored 1) total consolidated net-debt of Rs8.8bn, 2) cost of
capital of 13%; and 3) a tax rate of 30%.
Trading at 18% disc to our bear-case NAV
With NAVs are likely to remain volatile during recovery cycles, we highlight
the bull-case and bear-case scenario for Phoenix’s NAV. The bear case: 1)
factors in 2% terminal growth for HSP at 10% cap-rate (53% of NAV), 2)
values EWDPL, BARE and other hospitality projects on basis of undeveloped
land reserves (22% of NAV); and 3) factors in 1-2 yrs delays in the execution of
malls and hotel projects (Market City projects, 25% of NAV). Our bull case
builds in 1) a 9% cap-rate for HSP’s valuation; 2) 10% higher prices/rentals for
Market City projects and other assets; and 3) a faster execution cycle. We
believe this provides a good perspective on NAV downside risks and upside
potential.
Phoenix Mills
Phoenix Mills is a leading Indian developer of large-format retail-led mixed use
developments. Its developments are in prime locations feature retail stores;
hypermarkets; multi-screen theatres; entertainment zones; food courts; and
hotels, and total more of 2.5msf. The company began operations as a textile
manufacturing company in 1905 on 17.3 acres of land in Lower Parel, Mumbai.
In 1987, the company largely exited the textile sector and entered the real estate
market in Mumbai.
Statement of Risk
Key risks to Phoenix Mills include slowdown in retail recovery and economic
growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Phoenix Mills
S trong Qtr; Quality retail asset play
Event: Q1 beats UBS estimates; encouraging progress operationally
Standalone revenues and profits grew 16% YoY and 49% YoY respectively, ahead
of UBSe; QoQ growth was flat. Higher operating leverage at High Street Phoenix
(HSP), lower interest and higher other income drove this. Footfalls (1.4m per
month) were strong at HSP, good response on Pune mall launch, and launch timelines
of other malls intact. Further, it raised holding Bangalore mall to 46% (38%
earlier); and announced a 31% pay-out as dividend of Rs1.8/share for FY11.
Impact: Maintain our FY12E/13E on healthy retail consumption trends
This is on back of 1) growing HSP revenue sharing income, 2) rental re-negotiation
with anchors of 0.15msf in Phoenix, Mumbai; 3) new malls/hotel opening in FY12.
However, consolidation impact of new malls/hotel operational in FY12 may result
in some downside risk to our estimates and we await more details to factor the
same.
Action: Reiterate Buy; our top mid-cap pick in property
A quality retail asset portfolio at inflection point offering attractive return potential
on our target of Rs310. Key catalysts: 1) Ongoing rental revisions with anchors
(0.15msf) in HSP; 2) Successful/timely opening of Market City malls in Bangalore
(Sept’11), Kurla (Q3FY12) and Hotel Shangri-La (Q4FY12); 3) strong demand for
retail space with FDI opened up in retail and healthy retail consumption trends.
Valuation: Compelling at 50% disc to NAV
Target is at 25% disc to our NAV of Rs412. Valuations look compelling at: 1) a
50% disc to NAV, lower than Phoenix, Mumbai’s value of Rs218; and 2) 1.7x
P/BV—we see solid potential given rental annuity model & undervalued mall,
hotel assets.
Operationally doing well
Strong earnings from High Street Phoenix (HSP), Mumbai on 1) growing
revenue sharing contribution 2) new stores opened in 1Q were Wrangler, Lee,
Foodhall, Hidesign, Mobile Store, Seven East. Targeting EBITDA of 75% in
FY12 (vs. 71% in FY11). Await more clarity on timelines of 18,000sf
leasing, re-negotiation of 36,000ft with Big-Bazar; and 50,000sf with
Pantaloon – expect this to reflect in 4QFY12.
Market City malls progressing well —1) Pune launched in Jun’11, to see
scale-up in retailers opening (currently 30% operational, 85% leased); 2)
Bangalore (75% leased, targeting Sept’11 launch), Kurla (70% leased
targeting Q3 launch) and Hotel Shangri-La (operational in Dec’11) - we see
momentum pick-up; but have factored all assets to go live by Dec’11.
Chennai residential project has been soft-launched, a formal launch is
expected shortly – however the mgmt and channel checks suggest the initial
response from customers is encouraging.
On asset portfolio, the management continues to consolidate its stake in
Bangalore Market City – increased state from 37.8% to 46.4%. This is in line
with its strategy of consolidation, as opportunities arise.
Net debt has increased from Rs6.4bn in 4QFY11 to 7.9bn in 1QFY12, on
back of malls/hotel coming closure to launch timelines. However, don’t
foresee any interest/repayment worries with (D/E of 0.5x).
FY11 consolidated earnings varied from standalone primarily on
consolidation of 1) rentals from Lucknow mall (PML’s stake is 49%; mall
85% leased) of Rs 100-110mn and 2) sale of commercial premises at Pune of
Rs 170-180mn. Key variances: Revenues (consol.) Rs 2.1bn vs S/a Rs 1.7bn,
interest expense (consol) 227mn vs (standalone) 85mn.
Valuation compelling at 50% disc to NAV
Phoenix is differentiated by its unique rental annuity model. Its annuity (53% of
NAV) is a good valuation support. We believe a combination of a rental yield
model and NAV-based valuation methodology is most appropriate. Our price
target of Rs310 is based on a 25% discount to NAV of Rs412 factoring risks of
delays for its upcoming market city malls. We ascribe a lower discount to
Phoenix than to its Tier-II peers (30-35%) due to: 1) its strong rental annuity and
deleveraged balance sheet; 2) the near-term execution visibility.
Our NAV estimate of Rs412 is based on the following assumptions: 1) Rs218
per share for High Street Phoenix using a rental-yield model with a 9% cap-rate,
5% terminal growth; and Phase IV land (0.25msf) valued at Rs10,000/sf; 2) a
3.75msf economic interest in Market City projects (ex-hotels); 3) a 5.1msf
economic interest in EWPDL and BARE projects; and 4) Rs15-20m capital cost
per room for 1,000 rooms following its 75% stake in hospitality venture. This
apart, we have factored 1) total consolidated net-debt of Rs8.8bn, 2) cost of
capital of 13%; and 3) a tax rate of 30%.
Trading at 18% disc to our bear-case NAV
With NAVs are likely to remain volatile during recovery cycles, we highlight
the bull-case and bear-case scenario for Phoenix’s NAV. The bear case: 1)
factors in 2% terminal growth for HSP at 10% cap-rate (53% of NAV), 2)
values EWDPL, BARE and other hospitality projects on basis of undeveloped
land reserves (22% of NAV); and 3) factors in 1-2 yrs delays in the execution of
malls and hotel projects (Market City projects, 25% of NAV). Our bull case
builds in 1) a 9% cap-rate for HSP’s valuation; 2) 10% higher prices/rentals for
Market City projects and other assets; and 3) a faster execution cycle. We
believe this provides a good perspective on NAV downside risks and upside
potential.
Phoenix Mills
Phoenix Mills is a leading Indian developer of large-format retail-led mixed use
developments. Its developments are in prime locations feature retail stores;
hypermarkets; multi-screen theatres; entertainment zones; food courts; and
hotels, and total more of 2.5msf. The company began operations as a textile
manufacturing company in 1905 on 17.3 acres of land in Lower Parel, Mumbai.
In 1987, the company largely exited the textile sector and entered the real estate
market in Mumbai.
Statement of Risk
Key risks to Phoenix Mills include slowdown in retail recovery and economic
growth.
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