CMT – RBS

Seems fully valued

We expect a stable performance from CMT’s retail portfolio, although its city centre malls may underperform slightly due to competition. The REIT has sufficient fire power for acquisitions, but it is difficult to acquire as retail assets are in high demand. We retain our Hold rating as the stock seems fully valued.

On the prowl for greenfield projects

We believe CMT will pursue greenfield projects this year, given there are a number of commercial sites on the government’s land sales programme this year. CMT has the capacity to undertake S$680m worth of construction projects, based on regulatory limit. It also has debt headroom of S$1.4bn for acquisitions, assuming a maximum target gearing of 45%. In June, a JV between CMT and its parent CapitaMalls Asia lost (by a slim margin) to Lend Lease in the bid for a plum commercial development site in Jurong.

Building fire power for acquisitions

CMT is issuing a total of S$300m in notes in September, comprising: 1) S$150m due in four years at 2.85% pa; and 2) S$150m due in seven years at 3.55% pa. With this, S$200m will remain outstanding from its S$2.5m MTN established in 2007. We believe the REIT is taking advantage of the low rates to build up fire power for future acquisitions.

Portfolio performance should remain healthy

We expect earnings to result in stable rental growth in CMT’s retail portfolio and occupancy to remain close to 100%. However, growth at its city centre malls could be slower or stagnant given the high supply of malls at Orchard Road last year. About half of CMT’s portfolio is in the city centre.

Reiterate Hold

We maintain our Hold recommendation, with our DCF-based target price at S$2.10. Any yield-accretive acquisitions will be positive, but strong demand for retail assets makes it challenging for CMT to acquire. We think the stock is fully valued, trading at a 28% premium to its current book value. CMT yields 5.0% in FY10F and 5.3% in FY11F. We prefer Frasers Centrepoint Trust, which is pure suburban mall play and a clear acquisition pipeline.