CMT – OCBC

Gearing concern removed; Upgrading to BUY

Rights issue at steep discount. CapitaMall Trust (CMT) yesterday announced that it will be doing a 9-for-10 rights issue at an issue price of S$0.82 per rights unit. Issue price is at a steep discount of 43.4% to its closing price of S$1.45 prior to the trading halt. Approximately 1.5b units will be offered, raising gross proceeds of S$1.23b from the exercise. This rights issue came as no surprise as we had already previously stated our view that a balance sheet recapitalization may be needed for CMT. Of the proceeds raised, S$956.2m will be used to repay the borrowings due in 2009 and the estimated remaining amount of S$246m (less estimated issue expenses) will be used for asset enhancement initiatives (AEI), general corporate and working capital purposes. After the rights issue, CMT’s gearing will reduce from 43.2% to 29.1%.

Positioning for long term sustainable growth. Given its A2 credit rating by Moody’s and portfolio of quality assets, we do not think that the rights issue exercise is driven by refinancing issues. Instead, we believe that the purpose of the rights issue is for the long term sustainable growth of CMT’s portfolio. By paring down its gearing level now, CMT will have better financial flexibility to take on opportunities for AEIs and acquisitions in future.

Strong support from sponsor. As a demonstration of support for CMT’s rights issue, CapitaLand has agreed to subscribe for its proportionate rights units and also to subscribe for the excess rights units that are not validly subscribed, subject to a maximum total subscription limit of 60% of the total rights units.

Revising down our FY09-10 DPU forecasts. Taking into consideration the dilution impact of the rights issue, we are now revising down our FY09 DPU forecast by 37.3% from 14.5 S-cents to 9.1 S-cents. Our FY10 DPU forecast has also been revised down by 37.8% from 15.1 S-cents to 9.4 Scents. Upgrading to BUY. There is no change to our RNAV estimate of S$1.94 per share, but we are lowering our RNAV discount from 20% to 15% after our gearing concern has been removed. As such, our fair value of CMT has now been raised from S$1.55 to S$1.65 and our ex-rights fair value will fall to S$1.26. As there is a potential upside of 13.5%, we are upgrading CMT from HOLD to BUY.