CMT – OCBC

4Q10 results mostly in line; looks fully valued

4Q10 DPU of 2.36 S cents. CMT’s 4Q10 gross revenue of S$151.3m rose 8% YoY and 2.1% QoQ. Similarly, net property income increased 5.7% YoY and 0.25% QoQ to S$101.5m. The manager attributed the increase mainly to higher rental rates for new and renewed leases. There was an overall positive rent reversion of 6.5% for the 571 new leases/renewals contracted in FY2010. Nonetheless, operating expenses edged up 13.2% YoY and 6.2% QoQ, on the back of higher decoration expenses during the festive season. 4Q10 DPU amounted to 2.36 S cents, which is 1.7% lower than 4Q09 DPU of 2.40 S cents. Overall FY10 DPU is 9.23 S cents, which is slightly below our estimate of 9.4 S cents. The ex-date and distribution payment dates are 26 Jan and 28 Feb, respectively. This translates to an annualised distribution yield of 5% based on CMT’s closing price yesterday. CMT also repurchased S$100m of convertible bonds in Oct 2010, reducing CMT’s outstanding amount of convertible bonds to S$550.0m. CMT’s debt profile remains healthy with a gearing of 35.9% and average borrowing costs of 3.7%. It also registered strong portfolio occupancy of 99.3% as at 31 Dec 2010.

Cautiously optimistic on outlook. The 4Q10 DPU included the release of S$3.5m (or 0.11 S cents per unit) of taxable income, being the balance of the S$4.5m taxable income retained in 1Q10. However, tax-exempt income from CapitaRetail China Trust of S$10.1m received in FY10 has been retained and will be distributed in FY2011. The retention is a provision to meet an expected increase in refinancing costs for outstanding convertible bonds, with put options in 2011. As for asset enhancements, construction works for JCube and The Atrium remain in focus, but is expected to contribute to the group’s bottomline only in 2012 and 2013, respectively. Raffles City’s enhancement work was also completed in Nov/Dec with a realized ROI of 9% versus an expected ROI of 8%.

Less bullish on retail. The retail sector tends to be the most stable portfolio. It is relatively more defensible during a crisis, with a smaller percentage drop in asset values. However, this also means that its upside is likely to be limited during a recovery. With new retail supply coming up in 2011-2012 and lesser spending power from foreign visitors affected by the appreciating SGD, we expect retailers to remain cost-sensitive and any quarterly upside in retail rents is likely to be conservative and kept within 3%-5%, in our opinion. Given the limited upside, we maintain our HOLD rating for CMT with a revised RNAV-derived fair value of S$1.96.