CMT – OCBC

AEI engine re-ignited

Results in line with expectations. CapitaMall Trust reported its 3Q09 results and they were in line with our expectations. Gross revenue increased by 7.5% YoY and 0.6% QoQ to S$129.7m, driven by the acquisition of Atrium and completion of asset enhancement initiatives (AEI) at several malls. Net property income was up by 8.8% YoY and 0.8% QoQ at S$94.5m. Portfolio occupancy rate remained strong at 99.6% at end-3Q09 and CMT also managed to achieve better rental reversions from new and renewal leases in 3Q09. DPU of 2.35 S-cents was declared for the quarter.

Consumer spending outlook remains cautions. Shopper traffic at CMT’s retail malls declined by 3.2% YoY and 2.4% QoQ in 3Q09, which was partly attributable to the opening of new malls like ION Orchard. As such, gross turnover of CMT’s tenants declined by 2.5% YoY and 0.5% QoQ in 3Q09. There is still no strong pick up in consumer spending in 3Q09 as majority of the retail trade categories operating in CMT’s malls are still seeing negative growth in gross turnover for the year to date. Slow recovery in consumer spending is likely to cap any rental increase going forward.

Restarting the AEI growth engine. Nevertheless, growth could still be sustained by AEI and reconfigurations, which had been the key DPU growth driver since IPO. CMT has proposed to build a new underground link connecting Raffles City to Esplanade MRT Station, which is expected to open in 2Q/3Q 2010. This project is expected to cost S$33.23m and generate incremental value of S$10.94m to CMT. Expected completion date for this project is in 4Q 2010, after which CMT still has a pipeline of AEI that will follow through – Atrium and Jurong Entertainment Centre.

Fair value raised to S$1.69; maintain HOLD. We are now raising our fair value of CMT to S$1.69 (previously S$1.53) after adjusting our retail rent growth expectations to 0% for FY09 and FY10. Our FY09 and FY10 DPU forecasts have also been raised marginally to 8.98 S-cents (previously 8.95 S-cents) and 9.28 S-cents (previously 9.1 S-cents), translating to DPU yield of 5.2% and 5.4% respectively. Growth outlook is more positive now, with new AEI coming up. Opportunities for acquisition are also opening up, with HDB currently in search of a potential buyer for Clementi Mall, which has a suburban catchment and could be of interest to CMT. We maintain our HOLD rating on valuation ground but will turn buyer at prices below S$1.60.