CMT – OCBC

Encouraging signs of growth

In line with expectations. CapitaMall Trust’s 1Q10 results came in within our expectations. Gross revenue increased 3.4% YoY to S$139.1m, underpinned by higher new and renewal leases, and higher contribution from Sembawang Shopping Centre, where asset enhancement was completed only in late December 2008. Net property income increased 5.7% YoY to S$97.7m. Even though DPU of 2.23 S-cents for 1Q10 fell short of the 2.32 S-cents that we have projected, this was due to the retention of S$9.5m of taxable income this quarter. The higher amount of income retained in 1Q10 was a precautionary move against possible higher operating expenditures, as well as higher interest expense going forward.CMT still remains committed to a 100% payout of its distributable income for FY10.

Rent reversion should remain healthy at portfolio level. Management shared that 60% of leases expiring this year will be due for renewal in 2H10, and some of these rents were signed at the peak of the rental market 3 years back. A further analysis of CMT’s expiring leases shows that Plaza Singapura, Bugis Junction and Lot One are most prone to negative rent reversions this year but we note that expiring leases from these three properties account for just 24% of the current gross rental income from these expiring leases. The remaining portion of the expiring leases should still be able to enjoy positive rent reversions and this should be able to cover the lost income from negative rent reversions.

Encouraging operating statistics. We are seeing encouraging signs of growth from CMT’s operating statistics. Its malls turned in positive rent reversion of +6.2% in 1Q10, sharply higher than the +2.3% achieved in FY09. More trade categories are seeing increase in their gross turnover in 1Q10. While the portfolio occupancy rate fell to 99.4% at the end of 1Q10, this was attributable to the termination of a mini-anchor tenant at Plaza Singapura – Barang Barang, which filed for voluntary liquidation in Feb. CMT has already received offers from several interested parties for the vacated space.

Downgrade to HOLD on valuation ground. We are not making any changes to our forecasts and we maintain our fair value at S$1.93, which is pegged at parity to RNAV. The outlook remains positive and we continue to like CMT for its strength in capital management, retail asset management and enhancement. But with the recent increase in share price, projected total return has fallen to 9.6%. As such, we are now downgrading CMT to HOLD on valuation ground, with a view to accumulate at more attractive levels of S$1.75-S$1.80.