CMT – OCBC

Uncertainties over refinancing and rental rate outlook

Refinancing is still our focus for 2009. Going into 2009, refinancing of borrowings will remain the overhanging concern for CMT. CMT had not done any refinancing in 3Q08 but management assured that there is sufficient cash and bank facilities to refinance its borrowings due in December 08 (S$187.5m) and May 09 (S$80m). While previously we had assumed that part of the borrowings be refinanced by the medium term notes (MTN) programme, there is now little investor appetite for MTN, meaning that CMT would not be able to draw down its untapped MTN facility for refinancing.

Credit rating could be at risk. Recent spate of downgrading of S-REITs’ credit ratings reflects the cautious stance that rating agencies had taken on S-REITs and has also raised further concerns on their credit health. In May, rating agency Moody’s confirmed CMT’s A2 rating but revised its outlook to negative due to its weakened financial profile following the acquisition of Atrium@Orchard. We believe that the risk of credit rating downgrade is higher now given the current tight credit market and slowing retail rental rates. A downgrade could potentially raise CMT’s cost of refinancing and affect its future distributions.

Cutting back our retail rental expectations. In light of the worsening economic and job outlook, consumer spending could continue to slow down in 2009. As such, we are now taking a more conservative stance in our retail rental rate expectations and adjust our rental forecast from 0% to -5% per annum for FY09 and FY10.

Fair value lowered to S$1.94. We remain optimistic that CMT should be able to refinance its near term borrowings, given its portfolio of quality assets, track record of good access to the debt market and backing of a strong sponsor, CapitaLand. However, to reflect the tight credit market conditions, we are now factoring a higher increase in borrowing costs for FY09, from our previous forecast of +60bp to +100bp now. Also factoring in our new retail rental rate expectations, our FY09 DPU forecast has been cut by 6.8%, from 16.2 S-cents to 15.1 S-cents. We are also ascribing a 15% discount (no discount ascribed previously) to our RNAV forecast in light of the challenging condition in the retail market. As such, our fair value of CMT has now been lowered from S$2.57 to S$1.94. As upside to share price is still 35.7%, we maintain our BUY rating on CMT.