CMT – OCBC

Maiden contribution from China

Growth from CRS acquisition. CapitaMall Trust (CMT) reported a good set of 3Q07 results with revenue rising 39.5% YoY and 10.2% QoQ to S$114.5m. However, as operating cost grew at a much slower pace of 30.3% YoY and 2.2% QoQ, Net Property Income (NPI) was strong at S$76.8m +44.5% YoY and +14.5% QoQ. While no reason was given for the slower pace of operating cost growth, it did benefit from the full period consolidation of CapitaRetail Singapore (CRS) into its result as CRS was acquired in June 2007. Distributable income came in at S$53.2m, +29.1% YoY and 9.0% QoQ. The slower bottom-line growth was attributed to higher interest expense due to higher debt level from the consolidation of CRS. This was partly offset by the maiden contribution from CMT’s China associate CapitaRetail China Trust (worth about S$1.5m or 0.09 cent per CMT unit). DPU for the period came in at 3.4 cents and is slightly higher than our estimate of 3.2 cents. In light of the better performance, we are adjusting our FY07F and FY08F to 13.6 cents and 14.3 cents, up from 12.6 cents and 13.0 cents, respectively.
Benefitting from lower operating costs. In the current results, CMT benefited from higher NPI margins of about 67% as a result of lower cost escalation, which grew only 2.2% QoQ versus topline growth of over 10% QoQ. This is a reversal from 2Q07 where sequential cost grew 19% compared to revenue growth of 7%. However CMT’s NPI margin has historically not been stable and over the last 7 quarters, margin has varied from 63% to 68%. The cost inflation also does not appear to coincide with acquisitions. One possible explanation is a lag effect of cost recognition as a result of consolidation of new malls into its portfolio.

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. CMT continues to guide for a target asset size to S$8.0bn by 2010. In terms of valuation, CMT is not cheap as it is trading at a high price-to-book of over 1.77x and with yield at only about 3.7%. We maintain our HOLD rating and fair value of S$3.44.