CMT – Daiwa

No bargain

What has changed?

• CapitaMall Trust (CMT) announced its 3Q09 results on 22 October 2009. Its net-property income (NPI) of S$94.5m and distribution per unit (DPU) of 2.35¢ were both 1.2% above our forecasts.

Impact

• Gross revenue was 1.7% higher than our forecast, due to better-than-expected contributions from Raffles City and other assets. Lease renewals and signings for 3Q09 were done at an average of 2.3% above preceding rents, slightly above the average increase of 1.5% for 1H09. The market has recovered slightly, but we still regard leasing conditions as sluggish. CMT’s shopper traffic dipped by 3.2% YoY and 2.4% QoQ. The manager attributed the quarterly decline to the opening of ION Orchard. Management’s tone was still cautious about asset enhancement initiatives (aside from those planned for Raffles City and Jurong Entertainment Centre) and the bidding for the public-housing mall in Clementi.

• We have not changed our assumption that the CMT portfolio will face an average rental reversion of -1.5% for 2010, remain flat for 2011, and recover to an average rental reversion (over preceding rents) of 6% for 2012. After finetuning our assumptions, we have revised up our DPU forecasts by 0.5% for
FY09, 1.0% for FY10, and 1.5% for FY11.

Valuation

• We maintain our six-month target price of S$1.54, based on our RNG valuation (a finite-life Gordon Growth Model), which assumes an effective portfolio cap rate of 6.2% (about 50 basis points above CMT’s prevailing cap rate). On our revised estimates, CMT trades at a 12-month forward yield of 5.1%, the lowest in the Singapore real-estate investment trust sector. CMT’s NAV as at 30 September was S$1.57.

Catalysts and action

• We maintain our 4 (Underperform) rating for CMT. It offers a liquidity premium for yield-starved investors, but compared with other S-REITs, CMT provides neither an attractive yield or value, in our opinion.