CMT – OCBC

Guiding for larger size

Slightly worst off than 1Q. CapitaMall Trust (CMT) reported a modest set of 2Q07 results with revenue rising 35.8% YoY and 6.7% QoQ to S$103.9m. Income available for distribution (IAD) grew 27.6% YoY, but down 5.2% QoQ to S$48.8m. CMT declared 2Q DPU of 3.12 cents or +13% YoY and +4.0% QoQ. This is slightly below our forecast of 3.16 cents. The anomaly between sequential decline in the IAD and a sequential growth in DPU was due to a low DPU base. In 1Q07, CMT distributed only 90% of its IAD. If 100% of its 1Q07 DPU were distributed, its 1Q07 DPU would have been 3.3 cents (instead of 3.0 cents) resulting in 2Q07 seeing a 5.5% sequential decline, which is comparable to its IAD negative growth.

Higher operating costs and management fees to blame. CMT’s better sequential top-line performance was mainly attributed to the acquisition of 72.8% of CapitaRetail Singapore (CRS) bonds. However, the better revenue could not offset its higher operating costs which rose 19.3% QoQ. This was compounded by higher manager/trust fees which rose 22.7% QoQ. The net effect is that CMT suffered NPI margin decline of 4% QoQ to 65%. CMT attributed the higher operating costs to higher property tax and higher marketing and maintenance expenses. As for the higher managers’ fees, this was probably due to higher fees from the revaluation of its portfolio. An extra S$290m in revaluation surplus was added in 2H07.

Completed acquisition of CapitaRetail Singapore bonds. Over the last quarter, CMT completed the acquisition of 72.8% of CRS class E bonds for an aggregate value of S$516.9m. As CMT previously already owned 27.2% of CRS, it now owns 100% of CRS bonds and hence all the 3 malls within CRS.

Maintain HOLD. With the CRS acquisition, CMT’s asset size has been boosted from S$4.6bn (end 2006) to S$5.6bn (including revaluation surplus of S$290m from recent revaluation). Furthermore, with the likelihood of CMT acquiring a development project soon, it is on target to achieve an asset size of S$7.0bn by 2009. In light of this, CMT has revised up its target asset size to S$8.0bn by 2010. Even with the revalued portfolio, CMT is not cheap, trading at a very high price-to-book of over 1.75x and with yield at about 3.5%. We thus maintain our HOLD rating and fair value of S$3.44.