CMT – DBS

Still going strong

Story: CMT reported a 21% yoy (+4% sequentially) rise in Q2 revenue to $125.6m while net property income of $83.6m was 25% higher than a year ago. Distribution income grew 20% yoy to $58.6m (DPU: 3.52cts) and includes a $1m capital distribution from its stake in CRCT. CMT revalued its portfolio up by $281m (8%) to $6.2b (excl The Atrium), translating to a book NAV of $2.39.

Point: The better results were due to contributions from CapitaRetail Spore and 40% of Raffles City (bought in 2Q07 and 3Q07 respectively) and improved organic performance owing to higher rental rates and AEI initiatives at IMM, Plaza Singapura and Bugis Junction. On the average, leases were renewed at 9.9% higher than preceeding levels. This was partially moderated by a higher interest expense of $22.2m (+36.8% yoy) due to a larger asset base as well as higher cost of funds of 3.5% vs 3.4% a year ago. Looking ahead, organic growth will be
supported by the reversion of 69% of its portfolio income over FY09-10. Rollout of its planned $288m capex, largely from SSC and JEC, should boost bottomline. For The Atrium purchase, which is pending completion, it plans to spend $31m to decant office space and add more retail
area, bringing the overall retail component to 172ksf (48% of NLA) from the present 16k (4%). This will likely raise the yield of the building when completed by 2010.

Relevance: We have lowered our FY08 and FY09 DPU to 14.4cts and 15.3cts to adjust for higher funding costs. Correspondingly, DCF-backed price target is lowered to $3.55 to reflect a higher risk free rate and lower terminal growth rate to 1%. CMT is currently trading at FY08 and FY09 yields of 4.7% and 5% and offers potential upside of 16% to its price target. We continue to like CMT for its multi-pronged growth strategies with drivers from both organic and acquisition fronts, that would help maintain its pole position in the retail S-reit space. Maintain Buy.