CMT – JPMorgan

Safer than houses, plus a better return

• Low-risk stock unfairly penalized: The stock has dropped 15% over the last month, and underperformed the STI by 5% over that timeframe. CapitaMall Trust’s (CMT) S$350million placement raised funds to pay down expensive debt, reducing its gearing to 35%. The placement should remove fears of a funding overhang.

• Asset enhancement value-add to become the most significant growth driver: CMT’s manager is undertaking asset enhancement works on 8 out of the 13 malls in the portfolio, and we anticipate the incremental returns should accelerate DPU growth to a three year CAGR of 9.5% to FY Dec 09E. We have adjusted our DPU estimates for the placement, and set a S$4.00 end Dec 08E target price (based on DDM), implying 25% upside from current levels.

• Market is mis-pricing CMT’s cost of capital: Our valuation sensitivity analysis indicates the market is imputing a cost of equity capital more than 100bps above our 5.96% estimate, as
well as a reduction in long-term growth assumption. The trust has the ability to pass through inflationary pressures having fixed almost all of its cost of debt whilst having the pricing power to raise rents through its asset enhancement and active leasing initiatives.

• Key risks to our price target and rating include management’s inability to execute on asset enhancement initiatives, an unexpected slowdown in retail rental growth, and a sudden change in interest rate expectations.