CMT – OCBC

Acquiring Clarke Quay for S$268m

Acquiring Clarke Quay for S$268m. Yesterday, CapitaMall Trust (CMT) announced that it has entered into a sale and purchase agreement with CapitaMalls Asia (CMA) to acquire Clarke Quay for S$268m. The 99-year leasehold property has a net lettable area (NLA) of 294,610 sq ft and committed occupancy of 94.9%. The purchase price of S$268m is based on the most recent valuation that was done on 3 Feb by Knight Frank, which works out to be S$910psf on NLA. We expect CMT to fund this acquisition using debt, which will increase its gearing from 30.5% to 33.1%. The acquisition is still subjected to the approval of CMT’s unitholders. 

Acquisition benefits CMT, strategically and financially. Strategically, Clarke Quay helps to diversify CMT’s portfolio of non-discretionary spending focused retail malls by increasing its exposure to discretionary spending segment (leisure and entertainment) of the consumer market. Leisure and entertainment spending had been resilient in 2009 and this was evident in the 3.5% YoY growth in gross turnover of CMT’s tenants in the leisure and entertainment business. Being one of the favourite nightspots in Singapore, Clarke Quay also offers the added potential to capture the expected increase in tourism in Singapore. Financially, the acquisition is yield accretive to CMT’s unitholders, given its relatively higher NPI yield of 5.9% compared to the existing NPI yield of 4.9% of its portfolio. 

Sufficient room to grow this mature asset. We see potential for CMT to grow the future rental income of Clarke Quay by securing new tenants to raise occupancy rate and also from positive rent reversions coming from expiring leases secured at below market rent after the repositioning of Clarke Quay in 2006. The increase in tourism and tourist spending could also drive rents higher going forward. The existing valuation of Clarke Quay is relatively undemanding in comparison to the average valuation of CMT’s existing asset portfolio (S$1,767psf on NLA). With its higher NPI yield and growth potential, we see potential for future growth in valuation, which would increase CMT’s NAV. 

Fair value raised to S$1.93; Upgrade to BUY. Factoring in the acquisition, we are now raising our FY10 and FY11 DPU yield to 5.5% (previously 5.2%) and 5.7% (previously 5.4%) respectively. Our fair value has also been raised to S$1.93 (previously S$1.83). Recent market correction has made valuation attractive again and with a projected total return of 14.6%, we are now upgrading CMT from HOLD to BUY.