CMT – OCBC

Slowing reversionary growth in 3Q08

Slowing reversionary growth. CapitaMall Trust (CMT) reported a soft set of 3Q08 results. Revenue grew 3.3% QoQ to S$129.7m and the increase was largely attributed to the contribution of S$3.3m from Atrium@Orchard. New and renewal leases contributed just S$0.8m to the quarterly increase in 3Q08. Slowing rental renewal was further evidenced from the decline in the % increase in current rental rates against preceding rental rates between 2Q08 (9.9% increase for 6m08) and 3Q08 (9.3% increase for 9m08), implying that reversionary growth had slowed QoQ. DPU of 3.64 S-cents was announced for 3Q08, translating to an annualized yield of 6.9% base on yesterday’s closing price.

Keeping watch on debt refinancing. No refinancing was done in 3Q08 but management assured that CMT has sufficient cash and bank facilities to refinance its borrowings due in December 08 (S$187.5m) and May 09 (S$80m). However, the lack of investor appetite for medium term notes (MTN) means that CMT is unlikely to be able to draw down on its untapped MTN facility for refinancing purposes unless sentiment changes for the better. While this may have raised more uncertainties on the refinancing of the S$673.7m of borrowings due in August 2009, CMT still has a buffer period of 10 months to seek refinancing.

AEIs put on hold. CMT has also announced that it will be putting on hold its asset enhancement initiatives (AEI) for Funan DigitaLife Mall, Tampines Mall and Jurong Entertainment Centre due to the high construction cost and competitive market for resources. In light of the current tight credit market condition, we see these delays as a positive move by CMT not to overstretch its financial resources and affect its credit rating at a time when its credit health and refinancing should be the priority. AEI for Atrium@Orchard still remains on track and is now waiting for approval from authorities.

Fair value lowered to S$2.57. With further evidence of slowing rental reversion, we are now cutting our rental growth to 0% for FY09 and FY10, but we maintain our view on the defensiveness of retail REITs. As such, our FY09 and FY10 DPU forecasts have been lowered to 16.2 and 17.1 Scents, respectively. Also factoring in the decline in the share price of CapitaRetail China, our fair value of CMT has been lowered from S$3.05 to S$2.57. Current share price still provides an upside of 21.8% and we maintain our BUY rating on CMT.