CMT – Macquarie

Focused on growth

Event

• We met with the management of CapitaMall Trust for an update. The group continues to execute well on its strategy of deriving DPU growth from active leasing, asset enhancement and acquisitions. Maintain Outperform.

Impact

• More positive on rental reversions. Management was decidedly more positive on rental reversions than during the 2Q10 results briefing. For 2H10, the group is looking to maintain or exceed 1H10’s rental reversion (~+6%), despite renewals off a high 2007 base. Going into 2011 (where rentals are off an even higher rental base), negative reversions are not expected.

• Tighter cap rates to come. Cap rates remained stable in the June 2010 valuation versus December 2009, but the group sees rate compression in the retail space this year. When asked if this would make growth more challenging since asking prices would also rise, management said it would remain disciplined and acquire accretively.

• Focus on development projects. This makes development projects more likely given a higher yield on cost, versus chasing completed projects at higher prices. In terms of targets, the group will evaluate all the retail sites in the government land sales programme in the next 6-9 months.

• Given its substantial S$780m capacity (regulatory limit of10% of asset base) for development projects, it may not need to develop in joint-venture with sponsor CapitaMalls Asia depending on the size of the project. However, management may also evaluate if it wants to use all of this capacity on one site, or spread it out over a few developments.

• Lengthening debt maturity. The group has S$1.06bn of borrowings to refinance next year (S$685.3m convertible bond due 2013 with put option in 2011, and S$346.4m for its share of the fixed rate term loan for the purchase of Raffles City) and it will take the opportunity to lengthen debt maturity. The aim over time is for a less lumpy refinancing profile that better matches its distributable income per annum (~S$300m).

Earnings and target price revision

• No change.

Price catalyst

• 12-month price target: S$2.20 based on a DCF methodology.

• Catalyst: Potential development projects in the next 6-12 months.

Action and recommendation

• CapitaMall Trust is our top pick amongst the SREITs. We believe that execution on its fourth leg of growth, being development projects, will be a catalyst for the stock.