CMT – JPMorgan

The proxy for Singapore retail real estate

• Short term volatility expected. CMT declined 4.4% today following CapitaLand’s announcement of the proposed restructuring of its shopping mall business yesterday. Whilst the share price is likely to remain volatile in the short run, especially as investors make up their mind as to the specific risk/return profile they are seeking, we believe that CMT will remain as the liquid proxy for Singapore retail real estate, offering a stable return profile.

• Major AEIs should sustain high organic growth. Jurong Entertainment Centre (JEC) and Atrium @ Orchard (Atrium) are now back on the trust’s AEI schedule – construction for JEC will start by end of the year and that for Atrium will start by end 2010. We estimate, based on the trust’s original plan, that AEI for JEC will boost our FY11 DPU estimates by 4% and that for Atrium will boost our FY12 DPU estimates by 5%. These initiatives together with stable rental reversion should sustain CMT’s organic growth.

• Possible inorganic growth through development projects as well? With the portfolio size now substantial at S$7bn, CMT now has development capacity of up to S$700 million based on S-REITs guideline (10% of asset value), which would allow the trust to potentially undertake small retail development projects in Singapore. We do, however, believe that the acquisition of stabilized income producing assets will remain as the main source of the trust’s inorganic growth.

• We reiterate our Overweight rating on CMT, with our DDM-based Jun-10 price target unchanged at S$1.90/unit. Key risks to our rating and price target include a worse than expected rental reversion and long term rent growth; or a re-tightening of the credit market.