CMT – DMG
Fully valued; needs the acquisition push
Raising our target price to S$1.45 from S$1.74. Our DDM-backed target price reflects a lower cost-of-equity assumption of 9.3% (10.2% previously). We reduced our risk free rate assumption by 50bps due to continued low interest rates. CMT will be reporting 3Q09 results on 22 Oct and we expect annualised DPU of 8.39¢, a 41.3% decline over FY08. The decline in DPU is attributed to the rights adjustment. Maintain NEUTRAL. Await entry at S$1.55.
Attention could shift to CapitaMall Asia (CMA). The potential listing of CMA as an alternative Asian retail play could entice major investors. We believe this would be mildly negative on CMT. However, CMT still holds the first right of refusal to CMA’s assets including ION Orchard. We have not factored this into our estimates.
Actively scouting for assets. CMT has articulated its criteria for acquisitions as: 1) initial DPU accretion; 2) scope for asset enhancement; and 3) sustainability of market rents. We understand CMT is particularly keen on third party malls especially those of Pramerica, which could provide a strategic fit with its existing portfolio. Pramerica owns 4 suburban malls in Singapore.
Strong connectivity to boost retail footfalls despite rising competition. Singapore will see an unprecedented increase in retail space of 5.3m sqft by 2011. Out of which, downtown accounts for half of this new supply. Raffles City and Plaza Singapura (~30% of CMT’s rental income) are situated within this zone. We therefore expect higher competition; however this will be mitigated by its excellent connectivity to MRT stations. We are sanguine that the opening of the Circle Line and the two integrated resorts in 2010 will boost shopper traffic.
Maintain NEUTRAL rating. CMT trades at an unattractive 5.2% FY10 yield. While we continue to recognize CMT’s impeccable mall management expertise, valuations for the counter appear rich compared against its historical heyday yield of 5.7%. With a subdued earnings visibility, we view risk-returns on the counter as unfavourable and recommend investors not to accumulate the stock at current levels.