CMT – CIMB

Acquiring Clarke Quay

CMT buys Clarke Quay for S$268m 

Maintain Neutral. CMT has entered into a sale and purchase agreement to acquire Clarke Quay from its parent CapitaMalls Asia (CMA) for S$268m (or S$910psf of net lettable area). Based on the estimated property yield of 5.9%, and full debt funding, we expect DPU to increase by 2% on full-year contributions in FY11-12. While this would be an accretive acquisition, the impact on DPU would not be very material, in our estimation. Maintain Neutral, albeit with a higher DDM-based target price of S$1.91 (from S$1.88, discount rate 8.1%) after factoring in the acquisition. 

Accretive deal to be fully funded by debt 

Accretive deal. The net property yield of 5.9% based on FY09 net property income of S$15.8m and the purchase price of S$268m would be accretive vs. CMT’s portfolio NPI yield of 5.4%. Clarke Quay has been priced at book value with a cap rate of 6%. This is comparable to cap rates used for CMT’s suburban malls, at 5.5-6.6%; and similar to the 5.9% for the closest CMT mall in the vicinity, Funan DigitaLife Mall. CMT intends to fund the acquisition fully with debt, and expect cost of debt to be roughly the same as its blended interest cost of 3.5% as at Dec 09. We expect full-year revenue contribution to add 2% to DPU. Clarke Quay will increase CMT’s portfolio by 2.7% from S$7.4bn to S$7.6bn. 

Positive rental reversions likely. We estimate the net rent of Clarke Quay at S$4.70psf, which appears low considering its refurbished state compared with average suburban-mall rents which are in the teens. We believe this could be attributed to some long leases (such as to LifeBrandz which was reported to have taken a 6+6-year lease from 2006), and possibly discounted rent as traffic count in Clarke Quay before its refurbishment in 2006 had been poor. As such, we believe that rental reversions would be positive for Clarke Quay going forward. 

Sufficient funding sources. CMT has sufficient funding sources which include bank facilities and a S$2.5bn MTN programme in place. As recent as Jan 10, S$100m of 5-year notes were issued at 3.288%, below CMT’s average cost of debt of 3.5%. We believe that cost of debt for this acquisition should not vary very much from these levels. Asset leverage should rise to 33% after the acquisition, still unstretched. 

Unitholders’ approval required. As this is an interested-party transaction, an EGM would be held to seek unitholders’ approval. We expect this to be held some time in April, and estimate completion of the deal in July. 

More on Clarke Quay 

Clarke Quay is an integrated food & beverage, entertainment and lifestyle riverfront development. Located along the Singapore River, near Singapore’s CBD, Clarke Quay is within walking distance of the Clarkee Quay MRT station. Major tenants include Luminox Pte Ltd (wholly-owned subsidiary of LifeBrandz), Shanghai Dolly and The Pump Room. Clarke Quay underwent an extensive 2-year revamp costing S$85m which was completed in Dec 06. CapitaLand reported a 50% increase in visitor traffic after the revamp in its press release dated 26 Dec 06. 

Valuation and recommendation 

Positive deal for CMT. We believe this is an accretive deal at a reasonable price. An anticipated increase in visitor arrivals to Singapore this year as its two integrated resorts open should have positive spillover for centrally located tourist attractions and entertainment spots such as Clarke Quay. Hence, upward rental reversions are likely for this asset. 

However, impact on DPU is marginal. We include the purchase of this asset and have not changed our cost of debt assumption of 3.7%, further assuming 50% contribution from the asset in FY10. Our DPU estimate dips by 1% for FY10 as interest expense increases with debt, but rises by 2% for FY11-12 as full contribution kicks in. Our DDM-based target price rises accordingly to S$1.91 from S$1.88 (discount rate 8.1%). While this is an accretive acquisition, the impact on DPU should be immaterial, in our estimation. Maintain Neutral.