Discount to NAV / Analyst TP

In an earlier post on REITs, one screening criterion I mentioned was that of discount to NAV, akin to the notion of paying less than what something is actually worth. Recently, while reading through some analyst reports, another idea struck me, that of discount to analyst target price.

From what I can gather, most if not all of these analyst houses use some sort of discounted cash flow (DCF) method to arrive at their forward target prices (TP). Simply put, NAV is like the current valuation of a house (less the purchase loan), and a DCF TP is like what the house is worth based on the future rental income (forecasted) that it can fetch.

Below is a summary of the target prices gathered from 9 institutions for S-REITs.
Those highlighted in green are those with current discounts of >10% to both NAV and TP.
Those highlighted in red are those with current discount of >10% to NAV.
Those highlighted in yellow are those with current discount of >10% to TP.

Of the highlighted REITs, one in particular has caught my eye: CDLHT. It does not have the highest discount to the average TP at 14%, but shifting our attention to the other column, we see that it does have the highest premium to NAV of not just the highlighted selections, but of all the S-REITs, at 28%.

Evidently, the analysts must be seeing something that the market perhaps does not. Upon closer inspection of the analyst reports on CDLHT, I have picked out two main factors for the apparent optimism.

1. Strong balance sheet, especially after the recent placement exercise, points to probable acquisitions which would act as price catalysts
2. Singapore tourism boom with the improving global economy and further boosted by the opening of the two IRs

In my opinion, these seem sufficiently justified.

Normally, people pick stocks either as growth counters (for capital appreciation) or as defensive counters (for dividends). However, where possible, I would like to have a bit of both. Previously, I would choose a REIT primarily for its dividend yield, and then for its price appreciation as a secondary objective. Barring a double dip recession, which looks increasingly unlikely to me, the STI might just fluctuate within a range. In such a case, buying a REIT such as CDLHT would be first for price appreciation since the yield might not reach interesting enough levels for me when the market goes down. And if I manage to catch the CD period then even better, although that would only be at year end since CDLHT has a semi-annual policy and the first half dividends had been brought forward due to the placement exercise.

In the meantime, my rough guideline for entry into CDLHT would be the placement price of $1.71 plus minus, to be refined further with TA. Cheers!