Category: CMT
CMT – CIMB
Zooming in on asset enhancement
• Results in line; upgrade to Neutral from Underperform. FY09 DPU met Street and our expectations (101% of our estimate). We change our assumptions to reflect moderately stronger income growth, and higher but delayed capex. Our FY10-11 DPU estimates rise by 3%. We also introduce FY12 estimates. Following our upgrade, our DDM-based target price rises to S$1.88 from S$1.82 (discount rate 8.1%). We upgrade the stock to Neutral from Underperform as we are more assured of an improving retail performance in 2010 and a possible later injection of Ion Orchard. We see stock catalysts from accretive acquisition announcements.
• Full-year DPU of 8.85cts (CIMB-GK 8.59cts). DPU declined 7% yoy following more units from a rights issuance in 2009. Net property income (NPI) of S$376.8m was up 10% yoy, a net effect of full-year contributions from Sembawang Shopping Centre (re-opened after asset enhancement works), and full contributions from Atrium@Orchard. Distributable income of S$282m grew stronger than NPI, by 18% yoy following: 1) the release of S$4.8m of retained distributable income from 1Q09; and (2) the release of S$2.2m distribution income from CRCT retained in 3Q09.
• Occupancy and rental reversions positive. Occupancy in CMT’s malls remained nearly full at 99.8%. Rental reversions stayed positive at 0.8% p..a. Management is confident of better growth in rental reversions in the new financial year. While portfolio gross turnover per sf declined 2.4% yoy, it improved 11.3% qoq, signifying a recovery in the businesses of CMT’s tenants.
• Asset enhancement of Jurong Entertainment Centre (JEC) and Raffles City basement link would be carried out this year. The work would be completed in 1Q12 and 4Q10 respectively. Total capital expenditure is estimated at S$214m with ROI of 8% for both assets. The asset enhancement would be funded with cash on hand and existing bank facilities.
• Changes in assumptions. We raise our assumptions for income growth of retail malls by up to 7% (from 3%) and increase our capex assumptions for JEC to S$200m (from S$150m) to reflect the new plans announced, and later commencement of work at Atrium@Orchard. Our DPU estimates rise by up to 3%
for FY10-11.
CMT – BT
CMT’s Q4 distributable income rises 25.5%
HIGHER gross revenue from five malls has contributed to CapitaMall Trust (CMT) achieving a 25.5 per cent year-on-year surge in distributable income to $76.5 million for its fourth quarter ended Dec 31, 2009.
This in turn led to a 24.4 per cent surge in distribution per unit (DPU) to 2.4 cents for the three months.
The quarter’s DPU brought the total DPU for the 2009 full year to 8.85 cents, translating to a distribution yield of 4.97 per cent based on CMT’s closing price of $1.78 per unit yesterday.
Q4 gross revenue rose by 4.2 per cent to $140.1 million as five of CMT’s malls completed enhancement works and operating expenses fell.
For the year ended Dec 31, distributable income rose 18.3 per cent to $281.97 million while gross revenue grew 8.2 per cent to $552.7 million.
As at Dec 31, CMT’s occupancy weighed in at 99.8 per cent for its portfolio – which includes malls such as Junction 8, Tampines Mall and Plaza Singapura – up from 99.7 per cent as at Dec 31, 2008.
CMT has also commenced asset enhancement initiatives at Jurong Entertainment Centre and Raffles City, which are slated for completion in Q1 2012 and end-2010 respectively.
CMT is projecting an 8 per cent return on investment on its $200.32 million capital expenditure. The new Jurong Entertainment Centre will include an Olympic-sized ice skating rink.
Meanwhile, CMT is also working on reconfiguring the basement of Raffles City and constructing a new underground link which will add 12,180 square feet of net lettable area. Sixty-three per cent of this area has already been taken up.
Simon Ho, CEO of CapitaMall Trust Management Limited (CMTML) said yesterday: ‘We will be actively on the look-out for malls to buy . . . but we will be disciplined in our approach.’
He noted that the properties have to be yield-accretive and the income stream has to be sustainable.
CMT is also upbeat that the retail industry will benefit this year as the economy continues to pick up.
‘The improving economy and the opening of the two integrated resorts in 2010 should have a positive impact on the retail sector,’ said CMTML chairman James Koh.
Unitholders will receive the Q409 DPU on Feb 26.
CMT – JPM
Steady as she goes
• A liquid proxy to SREITs that offers stable return. CMT, being the largest and most liquid S-REIT, should offer a total return of 11% for the next 12 months on our estimates, which compares to S-REITs
sectoral average return of about 7%. We believe that the low risk – stable return profile coupled with the potential for further DPU upgrades make CMT an appealing stock, especially for investors with a low risk appetite.
• Asset enhancement & redevelopment to drive organic growth. The trust restarted its AEIs program in 3Q09. The upcoming announcement of Jurong Entertainment Centre redevelopment and Atrium @ Orchard AEI plans, which are likely to uplift FY11E and FY12E DPU by 4-5%, would be the near-term catalyst for any potential earnings upgrades. In addition, as retail sales picks up, we could potentially see increases in GTO rents, especially from the non-discretionary tenants.
• Catch-up in relative performance. CMT has underperformed the sector by 4% since the listing of CMA, as investors rebalance their exposure according to their risk appetite. The stock is currently trading at an undemanding valuation of 1.15x historical book and 265bps yield spread to 10-year government bond. In addition, we believe that the listing of CMA has further strengthened the retail platform for the trust.
• We reiterate our Overweight rating on CMT, with a Dec-10 DDMbased price target unchanged at S$2.00/unit. Key risks to our rating and price target include worse than expected operating performance
including lower rental renewal rate and occupancy rate, or a retightening of the credit market.
REITs – CIMB
Big caps grow expensive
• We downgrade the SREIT sector to Neutral from Overweight on a more negative view of sector heavyweights, CMT (fund flows away to CMA), CCT (negative rental reversions), A-REIT (falling industrial occupancy) and MLT (limited organic growth). Nonetheless, we believe that share prices have more room for appreciation as the sector P/BV of 0.83x remains below its mean level of 0.92x since inception (2002) till now, even after the sharp recovery from trough levels in March.
• Acquisitions and development projects will take centre stage in 2010. We believe that easy credit conditions coupled with recapitalised balance sheets and compressing dividend yields will revive acquisitions and project development in 2010. However, these will likely be less accretive than those in pre-Lehman times due to: 1) cash calls made in 2009 by a number of sponsor-backed REITs; 2) a more conservative outlook on asset leverage by REIT managers, which would result in a smaller quantum of acquisitions, or further equity-raising for acquisitions; and 3) insignificant spreads of asset yields over dividend yields, resulting in marginally DPU-accretive deals
• Asset inflation could lead to sector re-rating. An easing credit environment is drawing more institutional buyers of properties into the market. If the competition for investment assets intensifies, asset inflation is a possibility in the medium term.
• Negative reversions could set in. Most REITs will take time to catch up with market rents and occupancy due to standard leases set in place. We expect office, industrial business park and prime retail rents and occupancy to deteriorate further later in 2010.
• Suntec REIT our top pick for 2010. Our top pick for the sector is Suntec REIT for catalysts coming from the opening of two new MRT stations at Suntec City, and the Marina Bay integrated resort. Suntec REIT’s valuation of 0.65x P/BV is below the sector average of 0.83x, and also below its closest peer CCT’s 0.75x. However, 2010 dividend yields are higher than the sector’s 7.4% and CCT’s 5.8%.
• AREIT our top short. AREIT remains the most expensive REIT in the sector at 1.2x P/BV. We believe all the positives have been priced in. Downside risk is high as the attraction of low quasi-office rents in the Business Park and Hi-Tech segments gradually diminishes with a sharp fall in office rents.
CMT, CRCT – BT
Trump card for CapitaLand in CMA
CAPITALAND’S third-quarter report card released this week was a marked improvement from its showing in the first two quarters of this year. Still, the $167.2 million net profit that it achieved for the first nine months of this year is a far cry from the $1.18 billion in the same period last year.
However, plans to float a stake in its integrated shopping centre business under CapitaMalls Asia (CMA) by the year-end could add handsomely to CapitaLand’s fourth-quarter and full-year bottom lines.
CMA has a net asset value of $5.3 billion but assuming that its assets are valued at 1.5 to two times book value during the initial public offering (IPO), the total market worth of CMA would be about $8-10 billion. If CapitaLand floats a stake of 30 per cent, the pre-tax profit that it stands to book from the IPO could be in the order of $800 million to $1.4 billion.
CapitaLand’s management has indicated that the board may consider recommending a special dividend to shareholders following CMA’s flotation.
UBS Investment Research, in a recent paper, estimates that assuming an $8 billion valuation for CMA and a 30 per cent free float, the special dividend would work out to 27 cents per CapitaLand share if it decides to pay out 50 per cent of the IPO proceeds, and 54 cents per share assuming a 100 per cent payout.
On a $10 billion valuation for CMA and a 40 per cent free float, the payout could range from 45-90 cents per share.
Since CapitaLand announced its plans earlier this month to float CMA, its share price rallied about 21.5 per cent to a high of $4.46 on Monday, although it has given up much of the gain, ending at $4.15 yesterday.
By UBS’s calculations, an $8-10 billion valuation for CMA will add 61 cents to $1.06 to its revalued net asset value (RNAV) per share for CapitaLand, which it estimates at $4.30 based on CMA’s $5.3 billion book value. By launching an IPO, a higher value will be placed on the CMA business than if it remained as an unlisted part of CapitaLand. Or as CapitaLand’s management has put it, its plans to float CMA will ‘unlock shareholder value by crystallising the value of CapitaLand Group’s integrated shopping mall business’.
CapitaLand shareholders stand to gain by approving the group’s plans to float CMA. No doubt it will also be good for members of its management, whose pay packets should benefit from a stronger bottom line. And not to forget JP Morgan, the sole financial adviser.
However, some CapitaLand shareholders may also hold stakes in CapitaMall Trust (CMT) and CapitaRetail China Trust (CRCT), which many analysts reckon may fare less favourably after CMA is listed.
CMT may face short-term price weakness from asset reallocation to CMA, as UBS says. The process has already begun. CMT’s unit price has slipped from $1.82 before the announcement on CMA to yesterday’s closing price of $1.60.
CMA, with a portfolio of 86 malls in China, Singapore, Malaysia, Japan and India, may be more appealing to investors than CMT – which has a presence only in Singapore. CMA’s free float market cap could rival CMT’s. Still, CMA could find it worthwhile to sell assets, such as its 50 per cent stake in ION Orchard, to CMT given the tax transparency that CMT, as a real estate investment trust (Reit), enjoys in Singapore. In other words, if ION remains in CMA, the income from the mall will be taxed at the corporate tax rate (at the vehicle or CMA level). If however, ION is sold to CMT, the mall’s income will be exempt from payment of corporate tax at the Reit/vehicle level, under the tax flow-through allowed for Singapore Reits.
So CMA will retain an incentive (from the viewpoint of this tax saving at least) to develop, warehouse and sell assets to CMT – pretty much the arrangement that now exists between CapitaLand and CMT.
However, this may not be the case for CRCT. That’s because CRCT does not enjoy tax transparency since its income is derived from the ownership of malls in China, where it has to pay taxes on the income before it can bring it to Singapore.
This being the case, there could be less incentive for CMA to offload its China malls in future to CRCT. In fact, it may diminish or extinguish the raison d’etre of CRCT.
When CapitaLand floated CRCT in December 2006, it had planned to grow its initial $690 million portfolio of seven malls in China to $3 billion by end-2009. So far, it hasn’t been very successful. Today, its portfolio comprises eight malls worth $1.2 billion.
Who knows, CapitaLand could eventually privatise CRCT and let its China malls business sit entirely in CMA. This could provide a nice exit for CRCT shareholders.
These are some questions that CapitaLand shareholders who also own units in CMT and CRCT may ponder as they vote tomorrow on CapitaLand’s plans to float CMA.