CMT – OCBC

Buys CapitaRetail Singapore

Slightly better than expected 1Q. CapitaMall Trust (CMT) reported a fairly good set of 1Q07 results with revenue rising 1.0% QoQ to S$97.4m. Distributable income growth was better, rising 7% QoQ to S$51.5m with distributable income per unit (DPU) coming in at 3.0 cents. The stronger performance was attributed to better rates for new and renewed leases. For the period, CMT also benefited from lower operating expenses by about 5.2% QoQ. The lower cost was due to high base effect in 4Q06 as a result of one-off marketing and maintenance expenses incurred at Plaza Singapura.

Buying CapitaRetail Singapore. Separately, CMT also announced that it will be acquiring CapitaRetail Singapore (CRS) for an aggregate value of S$710m. As CMT current already owns 27.2% of CRS, the outlay for CRS will be S$516.9m. Presently, CMT’s gearing is about 37%; hence we see no issue with CMT financing this acquisition entirely with debt. We estimate that post acquisition CMT’s gearing will be at about 45% and this is still well within the 60% limit. However in terms of earnings accretion, CRS is unlikely to be a big booster as the assets are bought with a net property income yield of only 4.9%. Assuming full debt funding and cost of debt of 3.5%, we estimate full year DPU accretion at only 0.6 cents. Since the CRS acquisition is likely to complete in June, contribution in FY07 is only expected at about 0.3 cents.

Raising earnings estimates. Based on the above, we have raised our FY07 DPU forecast from 11.92 cents to 12.62 cents and FY08F DPU from 12.10 cents to 12.95 cents. CMT’s growth strategy remains focused on acquisitions, asset enhancement works (AEW) and development. We expect CMT’s maiden venture into development project to be in late 2007, and will probably be in Orchard Turn after the sale of the residential component.

Maintain HOLD. With the CRS acquisition, CMT’s asset size will be boosted from S$4.6bn to S$5.3bn. Furthermore, with the likelihood of CMT acquiring a development project soon, it is on target to achieve an asset size of S$7.0bn. In light of this, we have raised fair value from S$2.85 to S$3.44. CMT is not cheap, trading at a very high price-to-book of over 2.0x and with yield at below 3.5%. We thus maintain our HOLD rating.