Steady performer

• In line; maintain Neutral and target price of S$1.93. 2Q10 results met Street and our expectations. 2Q10 DPU of 2.29cts (+7.5% yoy) forms 25% of our full-year estimate of 9.1cts. 1H10 of 4.52cts (+10.2%) was also in line, at 50% of our FY10 forecast. We reduce our capex assumptions for JCube by S$35m according to management guidance on lower construction costs. Our DPU estimates increase by less than 1% for FY10-11 but there is no material change to our DDM-based target price (discount rate 8.1%) of S$1.93. Although we anticipate positive retail sales in 2H10 in view of mega-events such as the Youth Olympic Games and F1, there remains moderate downside risks from: 1) more than 700,000sf of NLA due for expiry in 2H10; 2) increased opex costs; 3) stiffer competition for CMT’s properties located in the central areas from newer malls; and 4) more than S$1bn of debt refinancing in FY11. Re-rating catalysts for the stock could include successful renewals with positive rental upside, in our view.

• 2Q10 net property income of S$98.8m (+5.3% yoy) was up on higher renewal rates and lower property expenses from lower property taxes, and maintenance and marketing expenses. Rental reversions grew 2% p.a. in 1H10, an improvement over the 0.5% p.a. growth in 1H09, mirroring positive retail sales.

• Portfolio occupancy as at 30 Jun 10 was 99.5%, a dip from 99.8% as at 31 Dec 09. The biggest decline came from IMM, down from 99.7% in Dec 09 to 97.9% in Jun 10 (-1.8% pts) due to the non-renewal of a junior anchor. Management remains confident of securing replacement tenants, as it did for other properties. For instance, Barang Barang departed from Plaza Singapura last quarter, but its space was shortly taken by Daiso’s new F&B concept with some rental upside.

• Asset enhancement initiatives (AEI) for JCube (previously known as Jurong Entertainment Centre) and Atrium@Orchard will be its priority in the short term. Updates include a reduction of capex by S$35m for JCube from lower construction costs and the commencement of Atrium@Orchard AEI in 1Q11, targeted for completion in 3Q12.

CMT to invest $150m to spruce up The Atrium

Singapore’s largest Reit posts 7.5% rise in distributable income for Q2

CAPITAMALL Trust (CMT) yesterday posted a 7.5 per cent year-on-year increase in second-quarter distributable income and unveiled plans to invest about $150 million in asset enhancement works at The Atrium @ Orchard. The amount is expected to be expended over a period of about two years.

The first three levels of The Atrium will be converted to retail use and linked to Plaza Singapura to create a seamless shopping experience. A canopy will be built along the open plaza between the two properties to maximise their combined 170-metre-long frontage along Orchard Road.

CMT has appointed RSP Architects Planners and Engineers as architect and Benoy as concept consultant for the asset enhancement works.

However, CMT officials stressed that the plans are still subject to approval from the authorities. ‘One variable is Stamford Canal (which runs below the two properties). Hopefully, there will not be too many technical conditions imposed by the authorities with regard to Stamford Canal,’ Simon Ho, CEO of CapitaMall Trust Management Ltd (CMTML), said at a results briefing yesterday.

Technical plans for The Atrium’s spruce-up have yet to be finalised but CMTML hopes to start work by early next year and complete them in Q3 2012.

Mr Ho also highlighted that CMT hopes to participate in greenfield mall development projects. The shopping centre Reit can potentially undertake development works of up to $800 million or 10 per cent of its $8 billion asset size, the limit for property development set under the Monetary Authority of Singapore’s guidelines for property fund.

At Funan, CMT has obtained outline planning permission to build an extension with about 300,000 square feet gross floor area of office space but there are no immediate plans to embark on the project as it may not be viable just yet.

CMT revalued its portfolio of properties at end-June 2010, which showed a $92.7 million fall compared with end-2009.

The slide was caused by a $127 million or 17.8 per cent fall in the valuation of The Atrium – understood to be due to lower office rental reversion assumptions. As a result, adjusted net asset value per unit (excluding distributable income) fell from $1.54 at end-2009 to $1.50 at June 30, 2010.

However, the fall in value of properties does not affect CMT’s distributable income to unitholders, which was $73.05 million for Q2 this year, up 7.5 per cent from Q2 last year. In addition to higher rental rates for new and renewed leases, lower property operating expenses also boosted distributable income.

Distribution per unit (DPU) for Q2 2010 was 2.29 cents, reflecting a 7.5 per cent year-on-year improvement as well as 1.4 per cent increase from the forecast based on CMT’s circular dated March 24 this year.

Gross revenue rose 2.8 per cent year on year to $142.5 million in Q2 2010. Net property income increased 5.3 per cent to $98.8 million.

For the first half, distributable income to unitholders improved 10.4 per cent year on year to $144.2 million on the back of 3.1 per cent growth in gross revenue to $281.6 million.

CMTML has retained about $9.5 million income in Q1 as a precautionary measure, given that 365 leases are due for renewal in the second half. But this will be distributed to unitholders by full year.

DMG & Partners Securities said in a report: ‘…We believe the retained earnings would be paid out in 2H 2010 to smoothen out any probable decline in DPU as a result of weaker rental reversions (in second half).’

For the 323 leases that were renewed in H1, CMT achieved 6.3 per cent average positive rental reversion.

CMT has completed refinancing its borrowings due this year and will now explore options to trim its $1 billion refinancing exposure for next year.

Total capital expenditure for asset enhancement works at JCube (formerly Jurong Entertainment Centre) is now projected at $165 million, down from $200.3 million originally, due to lower construction costs.

Gunning all engines

• 7.5% y-o-y growth in 2Q bottomline expected

• Organic growth, AEI to underpin mid term profits

• Maintain Buy. Slightly higher TP $2.09

Achieved 48% of full year forecast. CMT reported 2Q bottomline of $73.1m and DPU of 2.29cts (up 7.5% yoy, +2.3% qoq) on 2.8% rise in revenue to $142.5m, helped by higher rental rates. Expense ratio also dipped to <31% on lower maintenance charges. The group took a net revaluation deficit of $112m on its portfolio, largely coming from The Atrium, which had been written down to $1584psf. Cap rates remained largely unchanged. With the robust economic growth and rising retail sales, CMT was able to achieve 1H10 rental growth of 6.3% over preceding levels (2.3% in 2009) for the 323 leases (12% of total NLA) renewed in 1H10. Going into 2H10, we expect the group to enjoy positive rental reversions for the remaining 0.7msf (17% of NLA) due this year.

AEI at JCube and Atrium to complete 2011/12. Apart from AEI works at Raffles City, completing by Oct this year, asset enhancement at JCube has commenced and is scheduled to complete by end 2011. Cost of rebuilding this complex is 18% lower than earlier budgeted at $165m, translating to a higher ROI of 9.7%. The renovation timeline for Atrium in now slated to begin in 1Q11 and complete in 3Q12. The $150m exercise to decant office space into retail area will provide a seamless integration with Plaza Singapura on the first 3 floors, thus maximizing the use of Orchard Rd frontage. Apart from organic expansion, these activities are likely to significantly boost income from 2012 onwards.

Revving up growth drivers. We continue to like CMT for its multi-pronged growth drivers. Following the acquisition of Clarke Quay, the group is also exploring development projects, which are likely to give higher returns, albeit at slightly higher risk. Balance sheet remains healthy at 34.8% geared. We maintain our Buy call with a slightly higher TP of $2.09, translating to a total return of 10%.

Trading at unattractive yields; stock fully valued

2Q10 results within expectations. CMT reported 2Q10 DPU of 2.29¢ (+7.5% YoY; +2.7% QoQ), representing 24% of our FY10 DPU forecast of 9.45¢. Net property income rose 5.3% on higher rental reversion and lower operating expenses. Asset enhancement works for JCube and The Atrium remain in focus, and is expected to contribute to the group’s bottomline only in 2012. CMT will trade ex-2Q10 distribution on 30 July 2010. CMT trades at an unexciting yield of 4.8%, justifying our NEUTRAL view on the counter with a DDM-derived TP of S$1.90. Prefer FCT for its suburban retail exposure.

Asset enhancement in focus; poor traffic footfall observed at new link. CMT’s portfolio occupancy remained relatively unchanged at 99.5%. Asset enhancement works for Raffles City basement 2 link to Esplanade MRT was recently completed and the remaining works for basement 1 are scheduled to be completed by end-2010. We visited the link-mall at lunch today and observed poor traffic footfall. We believe this is largely due to three factors: 1) obscurity of the link-mall to Marina Square; 2) lifestyle-related retail offerings and 3) the weaker-than-expected MRT ridership on the Circle Line.

Positive rental reversion in 2H10 remains a challenge. In 1Q10, CMT retained S$9.5m (S$0.3¢ per share) of its distributable income, in view that 2H10 DPU could be affected by weaker rental reversions given that the bulk of the leases were locked-in at a high rate during the heydays of 2007. We believe the retained earnings would be paid out in 2H10 to smoothen out any probable decline in DPU as a result of weaker rental reversions.

Stock fully valued; recommend entry at S$1.80. While we continue to recognize CMT’s impeccable mall management expertise, valuations for the counter appear rich. Without accretive acquisitions, we believe the stock is fully valued. We prefer Frasers Centrepoint Trust (BUY / TP: S$1.66) given its attractive yield of 6% and pending asset enhancement of Causeway Point.