CMT – UOBKH

On An Acquisition Spree

CapitaMall Trust (CMT) has entered into a sale and purchase agreement with the Singapore government to acquire The Atrium@Orchard at S$839.8m, or S$2,249psf. The Atrium comprises two Grade A office towers of seven and 10 storeys with ground floor retail space. It is zoned as a commercial development. It is located above the Dhoby Ghaut MRT interchange station and adjacent to Plaza Singapura, which is part of CMT’s portfolio. Dhoby Ghaut MRT station is served by the North South Line, North East Line and Circle Line (ready in 2010). The acquisition is expected to be completed by end-Aug 08.

High gearing a concern. CMT has grown its asset size from S$6.0b to S$6.9b via this acquisition and has revised its local target asset size from S$8b to S$9b by 2010. Gearing has increased from 35.3% to 45.0%. Management appears eager to move on to acquire Clarke Quay (NLA: 262,230sf) and Orchard Ion (NLA: 660,000sf). CapitaLand is likely to monetise its investment in Orchard Ion once it is able to demonstrate stability of rental income. The injection of the two abovementioned assets will likely put a strain on CMT’s financial resources as the aggregate price tag exceeds S$3b.

We have revised our 2009 DPU forecast by 5.1% to 16.5 cents. We have factored in contribution from The Atrium as an office building and the impact of positive rental reversion. We are unable to assess the impact of asset enhancement initiative as management did not provide guidance on construction costs. The conversion of office space into retail space may require government approval.

CMT provides 2009 distribution yield of 4.71%. We have fine-tuned our dividend discount model to reflect the risk of more fund-raising exercises for the pipeline of acquisitions when both the equity and debt markets are fairly weak. Our new fair price is S$3.72. Downgrade from BUY to HOLD due to limited upside. Our entry price is S$3.10, which provides upside of 20%.