Encouraging signs of growth

In line with expectations. CapitaMall Trust’s 1Q10 results came in within our expectations. Gross revenue increased 3.4% YoY to S$139.1m, underpinned by higher new and renewal leases, and higher contribution from Sembawang Shopping Centre, where asset enhancement was completed only in late December 2008. Net property income increased 5.7% YoY to S$97.7m. Even though DPU of 2.23 S-cents for 1Q10 fell short of the 2.32 S-cents that we have projected, this was due to the retention of S$9.5m of taxable income this quarter. The higher amount of income retained in 1Q10 was a precautionary move against possible higher operating expenditures, as well as higher interest expense going forward.CMT still remains committed to a 100% payout of its distributable income for FY10.

Rent reversion should remain healthy at portfolio level. Management shared that 60% of leases expiring this year will be due for renewal in 2H10, and some of these rents were signed at the peak of the rental market 3 years back. A further analysis of CMT’s expiring leases shows that Plaza Singapura, Bugis Junction and Lot One are most prone to negative rent reversions this year but we note that expiring leases from these three properties account for just 24% of the current gross rental income from these expiring leases. The remaining portion of the expiring leases should still be able to enjoy positive rent reversions and this should be able to cover the lost income from negative rent reversions.

Encouraging operating statistics. We are seeing encouraging signs of growth from CMT’s operating statistics. Its malls turned in positive rent reversion of +6.2% in 1Q10, sharply higher than the +2.3% achieved in FY09. More trade categories are seeing increase in their gross turnover in 1Q10. While the portfolio occupancy rate fell to 99.4% at the end of 1Q10, this was attributable to the termination of a mini-anchor tenant at Plaza Singapura – Barang Barang, which filed for voluntary liquidation in Feb. CMT has already received offers from several interested parties for the vacated space.

Downgrade to HOLD on valuation ground. We are not making any changes to our forecasts and we maintain our fair value at S$1.93, which is pegged at parity to RNAV. The outlook remains positive and we continue to like CMT for its strength in capital management, retail asset management and enhancement. But with the recent increase in share price, projected total return has fallen to 9.6%. As such, we are now downgrading CMT to HOLD on valuation ground, with a view to accumulate at more attractive levels of S$1.75-S$1.80.

CMT optimistic of future growth

Its Q1 distributable income rises 13.6%; net property income up 5.7%

CAPITAMALL Trust (CMT) yesterday posted stronger results for the first quarter ended March 31 and signalled optimism ahead.

There will be more asset enhancement initiatives at Junction 8 and Tampines Mall. Ongoing works at Raffles City Singapore and Jurong Entertainment Centre are also on schedule.

‘We are now firing up all three engines of our growth strategy, comprising active lease management, asset enhancements and yield-accretive acquisitions,’ said Simon Ho, CEO of CMT Management. ‘We will also continue to be on the look-out for selective acquisition opportunities.’

CMT Management chairman James Koh also said that CMT ‘is poised to benefit further from the broad economic recovery and expected growth of tourist arrivals’.

CMT’s net property income in Q1 was $97.7 million, up 5.7 per cent from a year ago. Earnings improved as rents for new and renewed leases rose and operating and interest expenses fell. There was also greater contribution from Sembawang Shopping Centre after refurbishment works were complete.

Distributable income to unitholders grew 13.6 per cent over the same period to $71.1 million. Distribution per unit (DPU) for Q1 was 2.23 cents, and unitholders can receive this payout on May 27.

This DPU is 13.2 per cent higher than the 1.97 cents a year ago. The annualised DPU in Q1 was 9.04 cents, translating to a yield of 4.9 per cent based on CMT’s closing unit price of $1.86 on Tuesday.

The counter ended trading at $1.85 yesterday, one cent down.

CMT’s recent purchase of Clarke Quay brought its asset size as at March 31 to $7.8 billion. Its portfolio occupancy rate was 99.4 per cent, down from 99.8 per cent three months ago.

CMT is building a two-storey food and beverage annex block at Junction 8, which will have a net lettable area (NLA) of some 3,500 square feet. It will also reconfigure some retail units at Tampines Mall and relocate a taxi stand there. Works at these malls are expected to be done by the end of this year.

Meanwhile, asset enhancement works at Raffles City Singapore are also due for completion by year-end. Of the additional NLA of 16,285 sq ft to be created at Basements 1 and 2, over 70 per cent has been leased.

CMT said some years back that it might integrate Atrium@Orchard with Plaza Singapura and create more retail space. It told BT that the plan is under review, and there will be an announcement when it is firmed up.

CMT has refinanced all borrowings due this year with the issuance of medium-term notes in January, March and April. Taking the April issue into account, its pro forma gearing ratio as at March 31 would be 34.7 per cent.

SINGAPORE – CapitaMall Trust (CMT) posted a net property income of $97.7 million for its first financial quarter ended March 31, 2010, up 5.7 per cent from a year ago.

As a result, distributable income to unitholders rose. It was $71.1 million, up 13.6 per cent.

Distribution per unit (DPU) in Q1 was 2.23 cents, 13.2 per more than the same period last year.

CMT said in a news release on Wednesday: 'the improved performance was mainly due to upside from an increase in gross revenue arising from full contribution from Sembawang Shopping Centre upon the completion of asset enhancement works, higher rental rates for new and renewed leases and lower operating and interest expenses.'

Book closure is on April 29,2010.

Revving all engines

At a Glance

• Results in line

• Revving organic and AEI growth drivers

• Maintain Buy, TP $2.02

Comment on Results

Results in line with street estimates. 1Q10 revenue was up 3.4% yoy to $139.1m while NPI grew a better 5.7% to $97.7m on lower expense ratio of 30%. Distribution income (after retaining $9.5m of income and CRCT dividend) increased 13.6% yoy to $71.1m on lower interest cost. During the quarter, 132,107sf NLA (4.3% of total) of space were renewed at an average 6.2% higher rate than previously while occupancy slipped marginally to 99.4% due to the termination of a mini-anchor tenant at Plaza Singapura.

Revving all engines. Looking ahead, earnings will be driven by organic rental hikes, AEI and new acquisitions/ developments. As in 1Q10, leases are re-contracted at higher levels and we believe this trend could continue given the improving economic outlook. In addition, progressive completion of AEI works at Raffles City basement, J8 and Tampines Mall from 2Q10 onwards and the rebuilding of JEC by early 2012, would provide new fuel to grow income stream in the medium term. The purchase of Clarke Quay, at NPI yield of 5.6%, could add an estimated 0.1cts to FY10 DPU. On the capital management side, recent issues of S$200m and US$500m MTN helped to diversify its funding sources, extend maturity profile as well as unencumber assets. The group would also focus on rolling over $1.057b worth of loans and CBs that are due in 2011.

Recommendation

Maintain Buy, TP $2.02. We maintain our Buy call on CMT with a TP of $2.02, translating to a total return of 13.6%. In addition to good organic growth prospects, we believe CMT is well placed to acquire new assets or development activities with a strong balance sheet and low gearing of 34.7%. These have not been factored into our current valuations and could provide further upside to our numbers when actualized.

No surprises in earnings; fully valued

1Q10 results moderately below expectations. CMT reported 1Q10 DPU of 2.23¢ (+13.2% YoY; -7.1% QoQ) on higher gross revenue from the full contribution of Sembawang Shopping Centre following its asset enhancement works. Annualised DPU came in at 9.04¢, which is 4% below ours and street’s estimates of 9.4¢. We, however, believe CMT will see sequential improvement in its DPU over the next few quarters in view of positive rental reversions for its other properties as well as the distribution of the S$9.5m retained earnings. CMT will trade ex-1Q10 distribution on 27 April 2010. CMT trades at an unexciting yield of 4.9%, justifying our NEUTRAL view on the counter with a DDM-derived TP of S$1.90.

Retained S$9.5m from its distributable income. Had that amount been distributed, CMT’s DPU would have been 0.29¢ higher. Management decided to err on the side of caution by retaining part of its distributable income, given that the bulk of the leases due to expire this year were locked-in at a high rate during the heydays of 2007. Management cautioned that achieving positive rental reversions for those expiring leases may be challenging in 2H10.

Portfolio occupancy stable; asset enhancement in the works. CMT’s portfolio occupancy remained relatively unchanged at 99.4%. Unitholders have approved the acquisition of the S$268m Clarke Quay mall, which we believe will be mildly yield accretive (adding 0.11¢ to FY10 DPU). Asset enhancement works for Raffles City and Jurong Entertainment Centre are on track for completion by end-2010 and early 2012, respectively. To date, 70% of Raffles City’s NLA that will be created on Basement 1 & 2, has been committed.

Maintain NEUTRAL rating. While we continue to recognize CMT’s impeccable mall management expertise, valuations for the counter appear rich compared against its historical heyday yield of 5.7%. We believe CMT is in good position to undertake acquisitions owing to its strong balance sheet and low cost of equity. We have, however, not factored any acquisitions into our assumptions. Without accretive acquisitions, we believe the stock is fully valued.