CMT – JPM

Not more than a small tidy-up of balance sheet required

• The optics of gearing in a market intolerant of it: CapitaMall Trust (CMT)’s gearing is the highest of the top four S-REITs at 43.3%. Whilst our review of CMT’s financials in an adverse but (in our view) plausible downside scenario indicates a high level of resilience in the
REIT’s credit position, a modest equity fund-raising of between 10-20% new units would push gearing down below 40% whilst a 1-for-3 entitlement offer would raise sufficient equity to lower gearing to 31%.

• Operating and financing conditions have changed: Whilst Singapore’s suburban retail property fundamentals have been resilient through recessions, CMT’s operating risk has risen with 28% of the portfolio in non-suburban retail property assets (by value). The trust has S$1.8billion of debt (56% of the total) maturing in 2011-2012, which is sufficiently distant but we believe a far-sighted CFO will want to keep those debt maturities in view in any re-configuration of the REIT’s liability profile. CMT’s 2013 convertible bonds are trading at a yield to 2011 put at approximately 13.5%, and skew the trust’s aggregate cost of capital. We estimate CMT’s current implied cost of equity at 12.1%.

• Sectoral re-capitalization to be the dominant price factor: We expect the S-REIT sector’s debt refinancing and re-capitalization, including CMT’s own initiatives, to be the most significant factor propelling the trust’s unit price in the next 6 months.

• Dec 09 price target of S$2.20/unit: Our new price target (previously S$2.78) is based on a DDM using an 8.1% discount rate. A 1-for-3 entitlement issue raising about S$551 million would lower our estimate of CMT’s NPV by an immaterial 4% due to the offsetting effects of reduced financial risk. Key risks to our price target and rating come from a worse than expected deterioration in operating fundamentals, or a prolonged capital markets disruption which prevent a resolution of the anomalous costs of equity and debt capital.