CMT – OCBC

A leader in asset enhancement

Key strength lies in asset management and enhancement. The tight credit market has raised concerns that REITs could face a tougher time making yield-accretive acquisitions and thus resulting in slower DPU growth ahead. For CMT, investors should focus on its growth via asset management and enhancement instead, which can potentially generate between 8% to 25% return on investment. CMT had proven its astuteness in the area of asset enhancement initiatives (AEIs) and with its ongoing AEIs, CMT should still be able to grow its DPU even if there are no new future acquisitions and a freeze in rental rates.

Big is beautiful. Bigger REITs have comparative advantage over smaller REITs in the area of AEIs, as the latter may face a lower limit on borrowings, which is partly determined by asset value, and can not afford similar largescale AEIs. Bigger REITs such as CMT can leverage on their size to undertake larger scale AEIs that can generate higher incremental value without significantly affecting short term distribution.

Debt expiry profile. CMT will have S$936.2m of borrowings that need to be refinanced in 2008 and 2009, with the majority due in August 2009. Part of these can be refinanced using the untapped portion of its multicurrency medium term note programme. For the remainder, we do not think that there will be any serious issue in terms of refinancing with the backing of a strong sponsor – CapitaLand. CMT has also locked in the swap rate for five years for its S$320m term loan that is due for refinancing in August 2009, which protects it from any future increase in interest rate.

Resume coverage with BUY. Based on our RNAV valuation and factoring in The Atrium, we peg the fair value estimate for CMT at S$3.21, at par to its RNAV, which provides a potential upside of 16.8% from its last price of S$2.75 and offers FY08 and FY09 distribution yields of 5.3% and 6.3%, respectively. Share price has corrected 16.9% over the last 3 months, and CMT had underperformed the rest of the retail REITs and this brought its distribution yield closer to the rest of the retail REITs. We believe CMT deserves to trade at a premium to its peers, given its size advantage and visible growth from AEIs. We resume coverage on CMT with a BUY rating.