CMT – DMG

Trading at unattractive yields; stock fully valued

2Q10 results within expectations. CMT reported 2Q10 DPU of 2.29¢ (+7.5% YoY; +2.7% QoQ), representing 24% of our FY10 DPU forecast of 9.45¢. Net property income rose 5.3% on higher rental reversion and lower operating expenses. Asset enhancement works for JCube and The Atrium remain in focus, and is expected to contribute to the group’s bottomline only in 2012. CMT will trade ex-2Q10 distribution on 30 July 2010. CMT trades at an unexciting yield of 4.8%, justifying our NEUTRAL view on the counter with a DDM-derived TP of S$1.90. Prefer FCT for its suburban retail exposure.

Asset enhancement in focus; poor traffic footfall observed at new link. CMT’s portfolio occupancy remained relatively unchanged at 99.5%. Asset enhancement works for Raffles City basement 2 link to Esplanade MRT was recently completed and the remaining works for basement 1 are scheduled to be completed by end-2010. We visited the link-mall at lunch today and observed poor traffic footfall. We believe this is largely due to three factors: 1) obscurity of the link-mall to Marina Square; 2) lifestyle-related retail offerings and 3) the weaker-than-expected MRT ridership on the Circle Line.

Positive rental reversion in 2H10 remains a challenge. In 1Q10, CMT retained S$9.5m (S$0.3¢ per share) of its distributable income, in view that 2H10 DPU could be affected by weaker rental reversions given that the bulk of the leases were locked-in at a high rate during the heydays of 2007. We believe the retained earnings would be paid out in 2H10 to smoothen out any probable decline in DPU as a result of weaker rental reversions.

Stock fully valued; recommend entry at S$1.80. While we continue to recognize CMT’s impeccable mall management expertise, valuations for the counter appear rich. Without accretive acquisitions, we believe the stock is fully valued. We prefer Frasers Centrepoint Trust (BUY / TP: S$1.66) given its attractive yield of 6% and pending asset enhancement of Causeway Point.