CMT – UOBKH
1Q08: Organic growth from asset enhancements
Organic growth driven by asset enhancements. CapitaMall Trust (CMT) reported gross revenue of S$121.1m in 1Q08, an increase of 24.2% yoy. Revenue contribution from Bugis Junction, IMM Building and Raffles City grew 11.4%, 15.4% and 19.5% yoy respectively, benefiting from asset enhancement initiatives undertaken in FY07. 194,978sf of retail space representing 6.9% of total NLA was renewed at 10.4% over preceding rental rates in 1Q08. Net property income gained a faster 27.2% to S$84.7m in 1Q08 due to efforts to curb expenses, which was particularly successful at IMM Building.
Distributable income grew 27% yoy to S$65.4m. CMT announced DPU of 3.48 cents for 1Q08, an increase of 16% yoy, while retaining S$5.5m of its taxable income for distribution in subsequent quarters.
Enhancing Lot One and Bugis Junction. CMT will invest S$179.1m in FY08 for asset enhancement programmes. At Lot One Shoppers’ Mall, Levels 1 and 2 of the16,500sf four-storey retail extension was completed and tenants have commenced business. Level 1 of the retail extension will be connected to Chua Chu Kang MRT station. CMT will replace current opaque façade of the retail block at Bugis Junction with glass parapets to improve visibility of shops. Void areas at Levels 1 and 2 will be utilised for retail space and a mini-anchor space will be reconfigured to create six specialty shops.
The redevelopment of Sembawang Shopping Centre (SSC) with NLA of 128,413sf is on schedule for completion in 4Q08. CMT will decant 42,610sf of residential area and shift more retail space into the high-yielding basement, Level 1 and Level 2. 80% of total NLA has been committed and anchor tenants are Giant Hypermart, Daiso and Kopitiam.
Creating office blocks at Funan DigitaLife and Tampines Mall. CMT has received provisional permission to utilised unused gross floor area (GFA) of 385,500sf for Funan DigitaLife, which has only utilised 3.8 of its allowable plot ratio of 7.0. The unused GFA will be deployed for building a 4-storey office block with estimated net lettable area (NLA) of 277,630sf on top of the existing mall. NLA for retail will also increase by 14% from 296,601sf to 338,360sf. CMT was also granted an increase in plot ratio for Tampines Mall from 3.5 to 4.2. The additional GFA of 95,000sf will be utilised to build an office block on top of the existing mall. We expect construction to be completed by 2H 2010 and have factored in contributions from the two office blocks starting 1Q 2011.
Completed refinancing. CMT has refinanced S$312.8m bonds due in Feb 08 with S$320m term loan due in Aug 09. Interest rate for the term loan was fixed at 3.1%, lower than previous all-in rate of 4.3% for the bonds. CMT has also issued S$155m fixed rate note due in 2010 with interest rate at 3.25%. The company has largely completed the required refinancing for FY08. Current gearing is 35.3% and interest cover is comfortable at 4x in 1Q08.
Acquisitions in the pipeline. CMT is on track to increase asset size in Singapore from current S$5.9b to S$8b by 2010. Potential acquisitions in the pipeline from sponsor CapitaLand include Orchard Ion (NLA: 660,000sf), Clark Quay (NLA: 262,230sf) and One-North (GFA: 258,000sf). CMT will expand overseas with long-term target to have 30% of assets from overseas markets.
CMT provides FY08 distribution yield of 4.27%, a healthy spread of 1.92% over 10-year Singapore government bond yield at 2.35%. We have adjusted the terminal growth for our two-stage dividend discount model from 3.0% to 3.2% to reflect management’s ability to enhance rentals and capital values for its portfolio of retail malls. Our new target price for CMT is S$3.95.