Category: CMT
CMT – OCBC
Fully valued; maintain HOLD
Retail sales turning the corner. The July Retail Sales Index, excluding motor vehicles, registered an increase of 6% YoY and 1.3% MoM. Sales of shopping necessities as well as consumer discretionary, such as watches & jewellery, toiletries and wearing apparel & footwear recorded double-digits YoY growth. We reckon that retail sales for the rest of the year should sustain, bolstered by the upcoming F1 Grand Prix and the Dec festive shopping season. We believe burgeoning tourist arrivals and increasing consumer confidence, on the back of strong domestic GDP growth, will favour CMT’s retail tenants. This view is warranted to the extent that there are no further global economic fallouts taking place in 2H10.
Mixed tone on outlook. CMT has previously retained some S$9.5m or 0.3 S cents per unit of distributable income from 1H10 as a buffer against less than promising 2H10 rental reversions (16.8% of gross rental income are expected to expire in 2H10). 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. On the acquisition front, ION Orchard is still in the midst of stabilization and is unlikely to be released by its sponsor this year. We also take the view that increasing demand for retail assets may already have pushed prices to levels where CMT may find it challenging to acquire further.
Management is also keen to explore greenfield projects. The higher yield-on-cost for development projects must, however, be balanced by the longer gestation period (5-6 years) before yields stabilise. As of now, there are no indications from CMT that it will capitalise on this growth-inducing alternative.
Fully valued; maintain HOLD. CMT malls are strategically located in catchment areas (with an established or growing population), well connected to public transportation systems. While we continue to recognize CMT’s impeccable property selection proficiency and operational management, we believe that the trust is fully valued at current level without further accretive acquisitions or cost-effective development projects. CMT trades at forward yields of 4.9% FY10 and 5.2% FY11, compared to the Retail-REIT industry average of 6.4% and 6.6% respectively. While the broader S-REIT sector is trading at a 3.2% discount-to-book on average, CMT’s market value is markedly 37% above its book value. We are maintaining our HOLD rating with RNAV-derived fair value of S$2.01. Key risks to our view include (1) macro-economic headwinds, (2) rent renewals proving more challenging than expected, (3) lower than-expected tourist arrivals and (4) rising funding costs (interest rate risk and refinancing risk).
CMT – RBS
Seems fully valued
We expect a stable performance from CMT’s retail portfolio, although its city centre malls may underperform slightly due to competition. The REIT has sufficient fire power for acquisitions, but it is difficult to acquire as retail assets are in high demand. We retain our Hold rating as the stock seems fully valued.
On the prowl for greenfield projects
We believe CMT will pursue greenfield projects this year, given there are a number of commercial sites on the government’s land sales programme this year. CMT has the capacity to undertake S$680m worth of construction projects, based on regulatory limit. It also has debt headroom of S$1.4bn for acquisitions, assuming a maximum target gearing of 45%. In June, a JV between CMT and its parent CapitaMalls Asia lost (by a slim margin) to Lend Lease in the bid for a plum commercial development site in Jurong.
Building fire power for acquisitions
CMT is issuing a total of S$300m in notes in September, comprising: 1) S$150m due in four years at 2.85% pa; and 2) S$150m due in seven years at 3.55% pa. With this, S$200m will remain outstanding from its S$2.5m MTN established in 2007. We believe the REIT is taking advantage of the low rates to build up fire power for future acquisitions.
Portfolio performance should remain healthy
We expect earnings to result in stable rental growth in CMT’s retail portfolio and occupancy to remain close to 100%. However, growth at its city centre malls could be slower or stagnant given the high supply of malls at Orchard Road last year. About half of CMT’s portfolio is in the city centre.
Reiterate Hold
We maintain our Hold recommendation, with our DCF-based target price at S$2.10. Any yield-accretive acquisitions will be positive, but strong demand for retail assets makes it challenging for CMT to acquire. We think the stock is fully valued, trading at a 28% premium to its current book value. CMT yields 5.0% in FY10F and 5.3% in FY11F. We prefer Frasers Centrepoint Trust, which is pure suburban mall play and a clear acquisition pipeline.
CMT – Macquarie
Focused on growth
Event
• We met with the management of CapitaMall Trust for an update. The group continues to execute well on its strategy of deriving DPU growth from active leasing, asset enhancement and acquisitions. Maintain Outperform.
Impact
• More positive on rental reversions. Management was decidedly more positive on rental reversions than during the 2Q10 results briefing. For 2H10, the group is looking to maintain or exceed 1H10’s rental reversion (~+6%), despite renewals off a high 2007 base. Going into 2011 (where rentals are off an even higher rental base), negative reversions are not expected.
• Tighter cap rates to come. Cap rates remained stable in the June 2010 valuation versus December 2009, but the group sees rate compression in the retail space this year. When asked if this would make growth more challenging since asking prices would also rise, management said it would remain disciplined and acquire accretively.
• Focus on development projects. This makes development projects more likely given a higher yield on cost, versus chasing completed projects at higher prices. In terms of targets, the group will evaluate all the retail sites in the government land sales programme in the next 6-9 months.
• Given its substantial S$780m capacity (regulatory limit of10% of asset base) for development projects, it may not need to develop in joint-venture with sponsor CapitaMalls Asia depending on the size of the project. However, management may also evaluate if it wants to use all of this capacity on one site, or spread it out over a few developments.
• Lengthening debt maturity. The group has S$1.06bn of borrowings to refinance next year (S$685.3m convertible bond due 2013 with put option in 2011, and S$346.4m for its share of the fixed rate term loan for the purchase of Raffles City) and it will take the opportunity to lengthen debt maturity. The aim over time is for a less lumpy refinancing profile that better matches its distributable income per annum (~S$300m).
Earnings and target price revision
• No change.
Price catalyst
• 12-month price target: S$2.20 based on a DCF methodology.
• Catalyst: Potential development projects in the next 6-12 months.
Action and recommendation
• CapitaMall Trust is our top pick amongst the SREITs. We believe that execution on its fourth leg of growth, being development projects, will be a catalyst for the stock.
SREITs – MS
Growth Challenging; Yields To Support
Investment Conclusion: Post the recent S-reits’ results, we maintain our In-Line industry view as we believe valuations look fair. Upside from inorganic growth appears challenging as capital values seem to have bottomed and sellers are pricing forward asking prices. Rental reversions in 2011 are likely to be flat/negative as rents from peak 2008 roll-over, but this is already reflected in the share prices, in our opinion. Average yields of 6.0% look attractive vs. the current savings rate of ~0.25% and current MAS S$ 10yr bond yields of 2.0%, especially if expectations for long-term yields stay low. In a range-bound market, we believe investors may be content to collect dividends that look well supported. Strong demand for S$ bond issuance in 2010 suggests to us that the demand for yield-like products could be increasing, a positive for S-reits.
Difficult to grow via acquisitions: How things have changed. At almost every results briefing we attended, inorganic growth was a major focus of attention; especially with low gearing and balance sheets repaired. While it is generally positive for an S-reit to make an acquisition, we do not support an acquisition-at-any-cost philosophy. Acquisitions in Singapore will be difficult given the lack of quality assets and sellers’ increasingly optimistic outlook that is translating into higher asking prices, while the success of overseas acquisitions remains to be seen. A dogged focus on inorganic growth is likely to disappoint, but we think the focus should be on the stability of underlying portfolios’ and organic growth prospects that are looking up as the rental cycle bottoms.
CCT our preferred pick: With acquisitions challenging and rates likely to stay low, we prefer S-reits with higher dividend yields, or with specific pipelines of assets to acquire. Our top pick remains CCT, followed by Suntec REIT. Our least preferred S-reit is CMT. We like CCT for trough yields of 5.2% (FY11e) that may surprise on the upside if the rental cycle turns faster than expected.
CMT – Kim Eng
Sowing the seeds for organic growth
Event
• CapitaMall Trust (CMT) announced a 2Q10 DPU of 2.29 cts, resulting in a 1H10 DPU of 4.52 cts, in line with expectations. CMT’s net property income for FY10 improved by 5.5% yoy to $196.4m, mainly due to decreased operating expenses. CMT will also be considering development projects for selective participation. Maintain BUY.
Our View
• CMT continued to deliver a steady set of results, with 1H10 distributable income growing by 13.5% to $153.7m. It also enjoyed positive rental reversion, with new rents or new leases being signed at 6.3% higher than the preceding rates on average.
• Despite the opening of new malls, CMT’s portfolio occupancy rate remained at a robust 99.5%. AEI works at Raffles City and the redevelopment of JCube are now underway. CAPEX requirements for JCube’s redevelopment have been revised down by $35.3m to $165m due to savings in construction cost. CMT also aims to undertake AEI for The Atrium@Orchard from 1Q11 to 3Q12, which would lift CMT’s DPU from FY12 onwards.
• CMT has no immediate refinancing needs in the next 12 months. Management is open to selective participation in Greenfield development projects. This was demonstrated by its joint bid with its sponsor, CapitaMalls Asia, for the recent tender of a White Site at Jurong Gateway Road, which narrowly came in second. Based on the Property Fund Guidelines, CMT could undertake development projects valued at about $780m (or 10% of its deposited assets).
Action & Recommendation
The recently acquired Clarke Quay will start contributing in 2H10 and the rest of the portfolio should continue its consistent performance. Maintain BUY with a DDM‐derived target price of $2.23.