Trading at unattractive yields; stock fully valued

4Q10 results within expectations. CMT reported 4Q10 DPU of 2.36¢. FY10 DPU rose 4.6% to 9.24¢, in-line with our estimates. Net property income rose 5.7% YoY on an enlarged portfolio and higher rental income from existing malls. S$10.1m income from CRCT has been retained for distribution in FY11 in anticipation of higher interest costs on its CBs. We fine-tune our DPU estimates to account for lower occupancy at the Atrium during the AEI, lowering TP marginally to S$2.00. Maintain NEUTRAL as stock trades at an unattractive FY11 yield of 5.4% relative to precrisis yield of 4.2% in 2007.

Portfolio occupancy stable; asset enhancement works remains focus. CMT’s portfolio occupancy dipped marginally to 99.3% (from 99.6% in 3Q10). Positive rental reversion of 6.5% over preceding rents has been achieved YTD. AEI works to increase retail NLA at the Atrium by 6 times (while reducing office component) has begun, with capex at S$150m, ROI of 10.4%, and is projected to provide incremental revenue of S$20m, with completion expected in 4Q2012.

Greenfield development projects a re-rating catalyst. Yield accretive acquisitions are increasingly scarce and CMT is likely to look at participating in greenfield development projects, with its substantial development capacity of $800m (regulatory limit of 10% of asset base) and the higher yield on cost compared to income producing acquisitions.

Stock fully valued. While we continue to recognize CMT’s impeccable mall management expertise and positive outlook on suburban mall rents given recovery in domestic demand and robust tourist arrivals, valuations for the counter appear rich. Without accretive acquisitions, we believe the stock is fully valued.

4Q10 results mostly in line; looks fully valued

4Q10 DPU of 2.36 S cents. CMT’s 4Q10 gross revenue of S$151.3m rose 8% YoY and 2.1% QoQ. Similarly, net property income increased 5.7% YoY and 0.25% QoQ to S$101.5m. The manager attributed the increase mainly to higher rental rates for new and renewed leases. There was an overall positive rent reversion of 6.5% for the 571 new leases/renewals contracted in FY2010. Nonetheless, operating expenses edged up 13.2% YoY and 6.2% QoQ, on the back of higher decoration expenses during the festive season. 4Q10 DPU amounted to 2.36 S cents, which is 1.7% lower than 4Q09 DPU of 2.40 S cents. Overall FY10 DPU is 9.23 S cents, which is slightly below our estimate of 9.4 S cents. The ex-date and distribution payment dates are 26 Jan and 28 Feb, respectively. This translates to an annualised distribution yield of 5% based on CMT’s closing price yesterday. CMT also repurchased S$100m of convertible bonds in Oct 2010, reducing CMT’s outstanding amount of convertible bonds to S$550.0m. CMT’s debt profile remains healthy with a gearing of 35.9% and average borrowing costs of 3.7%. It also registered strong portfolio occupancy of 99.3% as at 31 Dec 2010.

Cautiously optimistic on outlook. The 4Q10 DPU included the release of S$3.5m (or 0.11 S cents per unit) of taxable income, being the balance of the S$4.5m taxable income retained in 1Q10. However, tax-exempt income from CapitaRetail China Trust of S$10.1m received in FY10 has been retained and will be distributed in FY2011. The retention is a provision to meet an expected increase in refinancing costs for outstanding convertible bonds, with put options in 2011. As for asset enhancements, construction works for JCube and The Atrium remain in focus, but is expected to contribute to the group’s bottomline only in 2012 and 2013, respectively. Raffles City’s enhancement work was also completed in Nov/Dec with a realized ROI of 9% versus an expected ROI of 8%.

Less bullish on retail. The retail sector tends to be the most stable portfolio. It is relatively more defensible during a crisis, with a smaller percentage drop in asset values. However, this also means that its upside is likely to be limited during a recovery. With new retail supply coming up in 2011-2012 and lesser spending power from foreign visitors affected by the appreciating SGD, we expect retailers to remain cost-sensitive and any quarterly upside in retail rents is likely to be conservative and kept within 3%-5%, in our opinion. Given the limited upside, we maintain our HOLD rating for CMT with a revised RNAV-derived fair value of S$1.96.

Growth momentum intact

• 4Q10 performance in line with expectations

• Positive rental reversion and AEI works to underpin growth

• Maintain Buy with TP $2.08

Results in line. 4Q10 topline revenue of S$151.3m was 8% higher yoy, benefiting from the acquisition of Clarke Quay and an organic improvement within its portfolio. However, NPI improved by a smaller 5.7% to S$101.5m due to seasonally higher cost-to-income ratio of 33%. Distribution income rose a modest 3.5% to S$71.8m, on greater financing expenses. The group took in a revaluation surplus of S$122.3m in 4Q10, lifting book NAV to S$1.55. Operation-wise, the group renewed 898,713sf of NLA (c25.4% of total) in 2010 with leases contracted at 6.5% above the previous period. This was supported by a 3.8% better pedestrian footfall and 6.4% higher gross turnover. In general, the city malls such as Bugis Junction, Clarke Quay and Raffles City did better with traffic flow increasing 6-14%.

Positive rental reversion to continue. We anticipate the rental uptrend to continue into 2011, underpinned by healthy economic growth and strong influx of tourists into Spore. Rental pricing power may also have improved as tenant occupancy cost fell from 16.7% in 2009 to 16.4% last year. An estimated 22.3% of NLA is due for reversions in 2011, largely from IMM and Bugis Junction. In terms of debt management, the group is well placed to refinance/repay its outstanding CBs of $579.9m if put in July 2011, with a cash balance of $713m as at Dec 2010.

Earnings momentum to pick up in medium term. Completion of AEI works at Raffles City will boost earnings this year, while redevelopment of JCube and The Atrium AEI, scheduled to reopen in 1Q12 and 4Q12 respectively, should provide a continual source of earnings growth when completed over the next 2 years. In addition, CMT is well placed to look for new acquisition/development opportunities with a current gearing of 35.9% or debt headroom of $810m.

Maintain Buy, TP $2.08. We continue to like CMT as the market leader in the Singapore retail space. It is on track to deliver a 3-pronged organic and inorganic growth strategy. Maintain Buy with TP of $2.08, implying a total return of 15%.

CMT Q4 distributable income dips

Fall lower than forecast; trust upbeat on future growth

CAPITAMALL Trust (CMT) rounded up the financial year with a 1.4 per cent year-on-year drop in distributable income in its final three months, though the fall was less than forecast.

In an announcement yesterday before the market opened, CMT said that distributable income to unitholders slipped to $75.4 million for the October-December period from $76.5 million before. But the fall was smaller than expected as the forecast distributable income was $73.9 million.

Distribution per unit (DPU) is 2.36 cents, compared with 2.4 cents a year earlier.

Unitholders will receive their payouts on Feb 28.

The DPU translates to an annualised distribution yield of 4.93 per cent based on CMT’s closing price of $1.90 on Jan 19.

A major contributor to the fall was finance expenses, which shot up 29.7 per cent on-year to $30.7 million due to higher interest costs incurred from the issue of fixed rate notes. This eroded a pick-up in gross sales and net property income.

Gross revenue edged 8 per cent higher to $151.3 million as compared with the corresponding period a year earlier, while net property income for Q4 climbed 5.7 per cent to $101.5 million.

CMT closed trading yesterday one cent lower at $1.89.

Said DMG in a research note: ‘While we continue to recognise CMT’s impeccable mall management expertise, and positive outlook on suburban mall rents given recovery in domestic demand and robust tourist arrivals, valuations for the counter appear rich.

‘Without accretive acquisitions, we believe the stock is fully valued.’

It is ‘neutral’ on CMT, and has set a unit price target of $2.

Standard Chartered Equity Research said that it has lowered its DPU expectations for the trust for FY2011.

‘We think CMT’s performance is likely to be capped in the next six months,’ said Standard Chartered.

It has kept its ‘outperform’ call and $2.39 price target on CMT, noting that the trust’s potential acquisitions and greenfield developments ‘can still act as positive surprises’.

Meanwhile, CMT has painted an upbeat picture on future growth.

Simon Ho, chief executive of CMT’s manager CapitaMall Trust Management Ltd, said: ‘We expect CMT to continue to enjoy healthy organic growth through continued positive rental increases … In 2011, we will also continue to focus on acquisitions of yield-accretive properties and selective participation in greenfield development projects.’

The completion of CMT’s asset enhancement works at Raffles City Shopping Centre will allow the trust to reap an incremental annual net property income of about $1.2 million this year, said Mr Ho. CMT has a 40 per cent stake in the mall.

The trust’s portfolio includes Tampines Mall, Funan DigitaLife Mall, Bugis Junction, Rivervale Mall and Plaza Singapura.

Mr Ho added that CMT will kick-start asset enhancement works for The Atrium@Orchard in January 2011.

For the full year, distributable income rose 4.6 per cent to $294.8 million. DPU was 9.24 cents against 8.85 cents a year ago.

Gross revenue increased 5.1 per cent to $581.1 million.