UPGRADE TO BUY – RESULTS IN LINE

•4Q results mostly in line

•AEI and Greenfield execution spot on

•Upgrade to BUY

4Q11 numbers broadly in line

CMT announced 4Q11 distributable income of S$75.5m or a DPU of 2.30 S-cents. Cumulatively, FY11 distributable income came in at S$301.6m, in line with our forecast of S$300.3m. Net property income for the year increased 4.8% YoY to S$418.2m, driven mostly by contributions from Clarke Quay and Illuma acquired in Jul10 and Apr11, respectively, and positive rental reversions.

Operating expenses tracking higher

Though we saw FY11 revenue increase 8.5% YoY (3.6% on a samestore basis), operating expenses tracked at a faster rate (up 16.7% YoY or 7.9% on a same store basis). We understand that this came mostly from one-time expenses and also utilities and maintenance costs. Management indicated that they are actively curtailing operating expenses and we expect less aggressive margin pressure in FY12-13.

Lower valuations at IMM and Sembawang Shopping Centre

In terms of fair value adjustments – IMM’s valuation was lowered by S$53m to reflect lower rentals and margins as it transitions further into a bargain outlet mall; and Sembawang Shopping Centre’s valuation was lowered by S$19m to reflect lower rentals expectations.

Management executing well on AEIs and Westgate

JCube is currently 90% committed and we expect asset enhancement initiatives (AEI) at Atrium@Orchard and Illuma to keep on schedule (completion in 4Q12 and 2Q12 respectively). Management also proposed AEI plans for Clarke Quay, recovering space from the anchor tenant at Block C (1/4 of the NLA) to refresh the tenant mix.

Upgrade to BUY

Management’s execution remains solid with new projects tracking closely to schedules. We also like that a substantial portion of income is derived from resilient suburban malls, given an uncertain economic outlook. Upgrade to BUY with a lower S$2.02 fair value (versus S$2.06 previously) with a 12m DPU forecast of 10.0 S-cents.

Expect a better second half

At a Glance

• FY11 DPU was 3% below our estimates, after a $5.1m income retention

• Completion of JCUbe and positive rental reversion to offset lower occupancies

• AEI works at Clarke Quay to yield 13% ROI

• Maintain BUY at a lower TP of S$2.05

Comment on Results

Full year DPU is 97% of our forecast. 4Q11 gross revenue rose by 4.3% y-o-y to S$157m. However, a faster increase in opex by 18.5% y-o-y dragged NPI by 2.6% to $98.8m. DPU was 2.3cts after $5.1m was retained. Operationally, the trust renewed 503 leases in FY11 with a positive rental reversion of 6.4% y-o-y on the back of 6.3% increase in tenant sales. However, occupancy fell 1.2 ppts q-o-q to 94.8% due to malls undergoing AEI.

Still a positive rental reversion picture, tapping into more low hanging fruits. Going forward, the trust will enjoy positive reversion, as 26.5% of the leases are due for renewal this year. Most of these leases were signed during the 2009 GFC. In addition JCube is on track to open its doors in 2Q12. Pre-commitments have reached >90%. This should mitigate further downside in occupancies (before picking up in 2H12) as the AEI works intensifies at The Atrium and Iluma. Meanwhile, the trust has announced AEI at Clarke Quay at a worth $15.6m, which will generate a decent 13% ROI. The AEI will commence in 2Q12, to be completed within a quarter.

Gearing at 38.4%, balance sheet remains strong. With S$145.8m revaluation surplus largely from a 15bps cap rate compression, net gearing ratio remained at 38.4%. Funding for the remaining AEI works including project financing for its development project at Westgate have been secured.

Recommendation

Maintain BUY, expect better 2H. We have cut our FY12/13 DPU by 6- 9% to 9.8cts/10.5cts to reflect the frictional vacancies during the upgrading works at its malls. As a result, our TP is cut by 1.5% to $2.05. We continue to like the retail sector and CMT as a market leader in this space is well positioned to weather any economic slowdown.

CMT’s Q4 DPU falls 2.5% to 2.3 cents

It posts distributable income of $75.5m, little changed from the year before

CAPITAMALL Trust (CMT) rounded up the financial year with a slight uptick in distributable income in its final three months, even as distribution per unit (DPU) fell 2.5 per cent to 2.3 cents.

CMT posted a distributable income of $75.5 million for the October to December period, little changed from $75.4 million the year before. DPU was 2.3 cents for the fourth quarter.

Unitholders can expect to receive distribution of 1.28 cents per unit for the period Nov 10 to Dec 31 on Feb 29. An advanced distribution of 1.02 cents per unit was paid on Jan 6.

For the full year, distributable income rose 2.3 per cent to $301.6 million. DPU was 9.37 cents – a yield of 5.35 per cent based on CMT’s closing price of $1.75 per unit on Jan 17 – against 9.24 cents a year ago.

FY2011’s performance was attributable to contributions from Clarke Quay and Iluma, as well as rental increases from new leases and renewal of existing leases, said CMT.

Gross revenue for the quarter rose 4.3 per cent year-on-year to $157.9 million. Iluma accounted for a $3.3 million increase in gross revenue, while the other malls contributed an increase of $3.2 million.

Said James Koh Cher Siang, chairman of CapitaMall Trust Management Limited (CMTML), the manager of CMT: ‘We renewed 503 leases with a positive rental reversion of 6.4 per cent, and achieved a 6.3 per cent year-on-year increase in tenant sales.’

High occupancy rates were generally maintained at CMT’s malls, apart from The Atrium@Orchard and Iluma, which clocked in 65.5 per cent and 53.3 per cent occupancy rates respectively, due to existing asset enhancement work. CMT portfolio’s overall occupancy rate as at end-2011 was 94.8 per cent.

CMT also said its asset-enhancement initiative (AEI) at Clarke Quay will start in Q2 this year. CMT intends to recover space from its existing anchor tenant to optimise the use of Block C and refresh the tenant mix; about 60 per cent of the new speciality area has already been committed.

Post-AEI, average rent is expected to increase from $3.80 psf per month to $6.87 psf per month.

The projected capital expenditure for this initiative is $15.6 million, with an expected return on investment of 13 per cent. Incremental net property income from this property is expected to be $2.02 million, when works are completed in 3Q 2012.

Other AEIs in progress include JCube, The Atrium@Orchard, and Illuma. To date, over 90 per cent of NLA at JCube has been committed; the mall is expected to open in the first quarter of 2012.

Atrium@Orchard and Iluma are on track to be completed by end-2012 and June, respectively.

Steps are also being taken to reposition Sembawang Shopping Centre, (SSC) said Simon Ho, chief executive of CMTML.

‘We’re not shy to adjust. If things don’t go right, we adjust. I think SSC would be a case in point,’ he said. ‘We’re bringing in some educational tenants as well because we see an opportunity … (These tenants include) Adam Khoo and Kent Ridge tuition centre. That will strengthen the overall trade mix in the mall itself,’ he said.

A separate area of concern is property operating expenses, which rose 18.5 per cent year-on-year to $59.1 million in Q4. Steps to mitigate this include the the replacement of chillers in IMM and Tampines Mall.

CMT said it expects utility savings from properties including Lot 1, Junction 8, and Rivervale Mall from Q2 onwards, although the full impact of the savings will only take effect from 2013.

CMT said its strong foundation would enable it to ride out potential economic uncertainties, partly because of the defensiveness of its portfolio, which is underpinned by predominantly necessity shopping malls, and rental upside from ongoing AEIs, which will be realised progressively over the next two years.

Westgate, a new mixed development in Jurong, had its groundbreaking earlier this month. Its target completion date is end-2013.

CMT’s counter ended yesterday down half a cent at $1.745.

CMT units fall on news of placement

CAPITAMALL Trust (CMT) units lost as much as 5.3 per cent yesterday after the retail trust said it raised gross proceeds of about $250 million through a private placement.

CMT placed out 139.7 million new units at $1.79 each to fund upgrading works and investments in several of its shopping malls.

Net proceeds from the placement amount to about $245.7 million.

The new units will be issued to over 30 existing and new institutional investors from Asia, the United States and Europe.

The proceeds from the private placement will provide CMT with greater financial capacity to ramp up its organic growth through asset enhancement initiatives, said Simon Ho, chief executive of CMT’s manager.

‘These initiatives – which include those already announced for JCube, The Atrium@Orchard and Iluma – are expected to boost CMT’s net property income for the next few years,’ Mr Ho said.

‘At the same time, the proceeds from the exercise will reduce CMT’s gearing and provide greater financial flexibility in view of the uncertain economic outlook.’

CIMB Research said in a new report that the private placement will help to strengthen CMT’s balance sheet and raise equity at a time when its share price has held up at 1.2 times price-to-book value.

‘This should quash near-term cash-call concerns while giving it the flexibility to drive growth through asset enhancement initiatives,’ said CIMB’s analysts, who issued an ‘outperform’ call on CMT with a price target of $1.93.

DMG & Partners Securities analyst Goh Han Peng similarly said that the new funds will come in handy for CMT to execute its asset enhancement initiatives. DMG maintained its ‘neutral’ call and target price of $1.94 on the stock.

Analysts were also positive on CMT’s move to reduce its leverage marginally. The private placement is expected to reduce the trust’s aggregate leverage from 40.1 per cent to 39 per cent.

‘Moody’s views the equity issuance positively as it will reinforce CMT’s commitment to maintain its leverage below its targeted 40 per cent,’ said Alvin Tan, Moody’s Investors Service’s lead analyst for CMT.

The ratings agency said it sees no impact on CMT’s ‘A2’ corporate family rating or its ‘A3’ senior unsecured debt rating from its private placement.

But the market reacted negatively to the placement, and CMT units fell to as low as $1.775 before ending 8.5 cents down at $1.79 yesterday. Not helping the counter was the broad market retreat, which saw the Straits Times Index fall 2.33 per cent.

CMT is Singapore’s largest largest real estate investment trust (Reit) and holds assets worth $8.6 billion.

CMT to raise up to $300m

CAPITAMALL Trust (CMT) is looking to raise up to $300 million through a private placement for asset enhancement works and to meet its capital expenditure needs, the retail trust said yesterday.

The $300 million placement includes an upsize option of about $50 million.

CMT, which is a unit of Singapore’s largest property group CapitaLand, will issue up to 167.6 million new units at $1.79-1.85 per unit.

The net proceeds from the private placement will amount to about $245.7 million (assuming the upsize option is not exercised) and $294.9 million (assuming the upsize option is fully exercised), CMT said.

A large chunk – some 90 per cent to 95 per cent – of the net proceeds from the placement exercise will be used to finance capital expenditure and asset enhancement initiatives, including those at on-going projects such as JCube, The Atrium@Orchard and Iluma.

The remaining 5 per cent to 10 per cent of the proceeds will be used for general corporate and working capital purposes.

The offer of new units under the private placement will be made to institutional and other investors.

The new units are expected to be issued on Nov 10.

CMT shed 1.5 cents to $1.875 yesterday before trading was halted at mid-day.