CMT – CIMB

On the road

CMT roadshow to KL

We brought CMT to Kuala Lumpur for a non-deal road show last week. Investors’ top concerns were the retail outlook in Singapore, the performance of CMT’s portfolio, and management’s acquisition and asset enhancement plans.

Defining “suburban mall” by location and positioning. Investors expressed concern over upcoming retail supply, particularly in central Singapore. Management pointed out that CMT’s portfolio resilience stems from its primarily suburban assets. The definition of “suburban” should not refer only to physical locations but malls’ positioning i.e. a suburban mall should offer a good selection of mass-appeal and necessity-based retail produces and services including cinemas, supermarkets, music schools and food courts. Plaza Singapura is a centrally located mall which management considers suburban in its positioning for residents in the districts of River Valley, Orchard Road and Mount Sophia. Repeat visits within the week are expected for CMT’s suburban malls due to their proximity to MRT stations and necessity-based offerings as opposed to destination-based malls in the primarily shopping belt. Thus, management does not consider Plaza Singapura to be competing directly with the three new malls that will be opening along Orchard Road over 2009-10. Non-suburban properties in CMT’s stable are limited to four assets: Atrium@Orchard, Raffles City, Funan DigitaLife Mall and Bugis Junction.

Traffic count at Tampines Mall stronger at opening of Tampines One. Despite the strong draw of new-to-market brands such as Uniqlo and Cache Cache Paris at competing mall Tampines One that opened in April, traffic count at Tampines Mall has not been worse off. In fact, within the first week of Tampines One’s opening, traffic at Tampines Mall increased 15% due to its larger number of food outlets and car-park lots.

Confident of renewing leases expiring in 2H09. There are 550 leases accounting for 21.5% of gross rental income which will be expiring in 2009. Almost half will come from IMM Building and Plaza Singapura. Leases due in IMM Building are mainly from offices and warehouses, and management is confident of renewing these leases or securing new tenants as passing rents are below market rates. We estimate current passing gross monthly rents for IMM offices at S$2.91 psf and warehouses at S$1.45 psf.

As for Plaza Singapura, the bulk of the space is taken up by hypermart, Carrefour, whose current lease was secured at the rental lows of 2003. We estimate current gross monthly passing rent for Carrefour at S$5.35 psf. Management is confident that competing malls in the Orchard area will not be able offer the same size at current passing rents. Moreover, if existing tenants decide not to renew, rates from new tenants are highly likely to surpass their rental levels.

Why rights issue? Management explained that although refinancing options are available to CMT, banks are only willing to lend up to three years, representing shortterm solutions. Stretching the current debt for another 2-3 years would result in a new expiry in 2011 or 2012 when significant debt would also be due. (This assumes that convertible bondholders will redeem at the 2011 option date.) Taking the rights issue path would allow CMT to pay down some debt and reduce its gearing. Following its rights issue and assuming immediate pay-down of debt due in 2009, asset leverage should come down to 29.2% from 43.1%. CMT’s long-term leverage will be about 35%.

Organic growth via asset enhancement. Management guides for flat DPU of 8.4cts for 2009-10 as increased contributions from newly enhanced Raffles City and Lot One could be diluted by reduced gross turnover rents and possibly flat reversions. Management intends to commence asset enhancement work at Jurong Entertainment Centre (JEC) at the end of 2009 and Atrium@Orchard at the end of 2010. Capex for both is estimated at S$300m. Prior to commencement, the following will have to be fulfilled: 1) leasing pre-commitments of 50%; 2) construction costs fixed; and 3) financing secured.

Leasing pre-commitments at JEC have been secured from the previous cinema operator, a supermarket as well as a food court. Leases for these anchors will range from three to 10 years. The decision to postpone asset enhancement work at JEC although operations have ceased since Nov 08 was based on expectations of declining construction costs by 2H09, when Singapore’s two Integrated Resorts will be close to completion. For Atrium @ Orchard, management expects approval from the relevant authorities to take another 12-18 months.

Acquisitions. Clients also wanted to find out management’s acquisition plans, particularly for Ion Orchard (jointly owned by sponsor CapitaLand and Sun Hung Kai). Management indicated that a stabilised yield from Ion Orchard will be needed before acquisition, and new malls typically take one year to achieve that. Hence, a more realistic time to acquire Ion Orchard would be after 2H10.

Valuation and recommendation

Maintain Underperform at S$0.87 for now. We came away from the roadshow with more clarity on management’s growth strategy. CMT has a post-rights adjusted P/BV of 0.83x and a forward yield of 6.8%. We maintain our Underperform rating and DDMbased target price of S$0.87 (discount 9.7%) for now. We are reviewing our estimates for a potential upgrade.