CMT – MS

Relatively Less Attractive, Better Yield Elsewhere

Better Yield Elsewhere: Maintaining our Equal-weight rating on CapitaMall Trust, we have a new lower price target of S$1.52 (from S$2.05). The lower price target reflects our lower rental assumptions for CMT as well as attempts to capture the risk of our bear case panning out as the macro environment remains fragile. Assigning a 20% probability that our bear case may pan out, we have a new price target of S$1.52 for CMT versus the S$1.66 suggested by our base case DCF-driven NAV. While we like CMT’s relatively defensive suburban retail asset portfolio, we find CapitaCommercial Trust (CACT.SI, EW, S$0.81), our new sector top pick’s risk reward more compelling, offering a higher DPU yield of 14.5% and 13.6% for FY09-2010F versus CMT’s 8.7-8.3% DPU yields.

Suburban retail relatively safer but not immune: Suburban malls constitute 46-49% of CMT’s total asset value and net property income, which are relatively more defensive, as suburban malls are less dependent on tourism and consumer discretionary spending, which has been on a downtrend. Given that management will be putting on hold its asset enhancement plans for Funan Digital Mall, Tampines Mall, Jurong Entertainment Centre and Raffles City’s Phase 3 works due to the current market uncertainties, as management is in cash preservation mode, a number of its assets remain undervalued.

Sector dependent on macro recovery: The market is likely to remain skeptical on the viability of the S-REIT business model given its heavy reliance on credit and will be keeping a watch on the ability and cost of the S-REIT debt refinancing in 2009. For now, we believe S-REITs are likely to trade in line with the STI Index.