3Q09 results above expectation, AEI to restart

• CMT announced 3Q09 results, DPU of S$0.0235/unit, annualizing 5.4% yield. The trust retained 3.2% of its distributable income for 4Q09. Distributable income YTD hit S$213million, 4% ahead of our estimates and consensus estimates on the back of better than expected rental income. We have therefore raised our DPU estimates by 4 – 5% for 2009 – 2011. Stock will trade ex-3Q09 distribution on 28 Oct 09.

• Raffles City AEI announced. The trust re-started its AEI program after putting it on hold for a year. Management intends to create a new underground link at basement 2 of Raffles City and to reconfigure its basement 1. CMT planned to spend a total of S$33mil capex targeting 8% ROI for this AEI, and we estimate a 1% accretion to CMT’s FY11 DPU. In addition, the trust is in the process of planning for a complete refurbishment of Jurong Entertainment Centre (JEC), and we expect a detailed plan, including required capex, to be announced in 4Q09.

• Short term volatility expected. With CapitaLand undergoing its proposed restructuring of its shopping mall business, we believe CMT’s share price is likely to remain volatile in the short run, especially as investors make up their mind to the specific risk/return profile they are seeking. We believe, however, that CMT will remain as the liquid proxy for Singapore retail real estate, offering a stable return profile. In addition, with its portfolio size now at S$7bn, the trust has the capacity to take on small development projects, and we would watch out for the upcoming tender (10th Nov 09) for Clementi Mall, a semi-completed suburban mall at the Clementi Bus Interchange.

• We reiterate our OW rating, and raise our Dec-10 DDM based price target to S$2.00/unit. Key risks to our rating and price target include a worse than expected rental reversion and long term rent growth; or a
re-tightening of the credit market.

CMT’s Q3 distributable income jumps 23.3%

Unitholders will receive the Q3 distribution of 2.35cents on Nov26

CAPITAMALL Trust (CMT) yesterday posted a net property income of $94.5 million for the third quarter ended Sept 30. This is 8.8 per cent more than a year ago.

Higher net property income was driven by an increase in gross revenue, from the purchase of The Atrium@Orchard and the completion of asset enhancement works at Sembawang Shopping Centre.

Distributable income rose 23.3 per cent from last year to $74.9 million.

Despite the higher earnings, CMT’s distribution per unit (DPU) in Q3 was 2.35 cents – down 35.4 per cent from the 3.64 cents a year ago. This reflects the larger unit base from a rights issue early this year.

Adjusting for the rights issue, the DPU in Q3 last year would have been 1.91 cents. This would have translated to a 23 per cent year-on-year growth.

Unitholders will receive the Q3 distribution of 2.35 cents on Nov 26. On an annualised basis, the DPU is 9.32 cents, representing an annualised yield of 5.27 per cent based on the closing unit price of $1.77 on Wednesday.

Notwithstanding the economic slowdown, CMT managed to record positive rental reversions from January to September. Across its portfolio, rental rates have risen 1.8 per cent over preceding rates typically committed three years ago.

CMT’s portfolio occupancy rate as at Sept 30 was 99.6 per cent, just 0.1 percentage point lower than nine months ago.

‘Recent economic data indicate that the worst may be over,’ said chairman of trust manager CapitaMall Trust Management, James Koh. ‘With the clear but modest recovery, we expect retail sales in the upcoming months to be supported by festive spending.’

CMT, together with CapitaCommercial Trust, will start on asset enhancement works at Raffles City in Q4 2009. The initiative will cost $33.23 million, and is expected to contribute positively to CMT’s income when works are completed in Q4 2010.

Preparation for asset enhancement works at Jurong Entertainment Centre is also on track, CMT said.

The counter lost four cents yesterday to close at $1.73.

AEI engine re-ignited

Results in line with expectations. CapitaMall Trust reported its 3Q09 results and they were in line with our expectations. Gross revenue increased by 7.5% YoY and 0.6% QoQ to S$129.7m, driven by the acquisition of Atrium and completion of asset enhancement initiatives (AEI) at several malls. Net property income was up by 8.8% YoY and 0.8% QoQ at S$94.5m. Portfolio occupancy rate remained strong at 99.6% at end-3Q09 and CMT also managed to achieve better rental reversions from new and renewal leases in 3Q09. DPU of 2.35 S-cents was declared for the quarter.

Consumer spending outlook remains cautions. Shopper traffic at CMT’s retail malls declined by 3.2% YoY and 2.4% QoQ in 3Q09, which was partly attributable to the opening of new malls like ION Orchard. As such, gross turnover of CMT’s tenants declined by 2.5% YoY and 0.5% QoQ in 3Q09. There is still no strong pick up in consumer spending in 3Q09 as majority of the retail trade categories operating in CMT’s malls are still seeing negative growth in gross turnover for the year to date. Slow recovery in consumer spending is likely to cap any rental increase going forward.

Restarting the AEI growth engine. Nevertheless, growth could still be sustained by AEI and reconfigurations, which had been the key DPU growth driver since IPO. CMT has proposed to build a new underground link connecting Raffles City to Esplanade MRT Station, which is expected to open in 2Q/3Q 2010. This project is expected to cost S$33.23m and generate incremental value of S$10.94m to CMT. Expected completion date for this project is in 4Q 2010, after which CMT still has a pipeline of AEI that will follow through – Atrium and Jurong Entertainment Centre.

Fair value raised to S$1.69; maintain HOLD. We are now raising our fair value of CMT to S$1.69 (previously S$1.53) after adjusting our retail rent growth expectations to 0% for FY09 and FY10. Our FY09 and FY10 DPU forecasts have also been raised marginally to 8.98 S-cents (previously 8.95 S-cents) and 9.28 S-cents (previously 9.1 S-cents), translating to DPU yield of 5.2% and 5.4% respectively. Growth outlook is more positive now, with new AEI coming up. Opportunities for acquisition are also opening up, with HDB currently in search of a potential buyer for Clementi Mall, which has a suburban catchment and could be of interest to CMT. We maintain our HOLD rating on valuation ground but will turn buyer at prices below S$1.60.

High capex needs

• Maintain Underperform; target price raised to S$1.74 (from S1.54). 3Q09 results were in line with Street and our expectations. Revenue was up with increased contribution from more assets. We remain confident in the resilience of its suburban assets, but expect high capital expenditure for Jurong Entertainment Centre and Atrium@Orchard to strain distribution growth in the medium term. High capex needs and higher-than-peers valuations cause us to maintain our Underperform rating.

• DPU in line, despite retention of S$2.5m. YTD DPU of 6.45cts forms 75% of our full-year forecast. Distributable income of S$74.9m was up 23% yoy on contributions from Atrium@Orchard, the completion of asset enhancement work at Sembawang Shopping Centre and moderate growth (1.8%) in renewed rentals. This excludes S$2.5m of distributable income received from CRCT retained for distribution in the last quarter. (YTD, CMT has retained S$7.3m, which it has committed to distribute by 4Q09.) Nonetheless, DPU for 3Q09 (2.35cts) was down 35% yoy due to increased units after its rights issue.

• Reducing lumpiness in debt expiry, before acquisitions. The credit market is improving. Management says there have been increasing offers for longer debt tenures ranging from five to 10 years vs. only three years earlier. Indicative spreads are 175bp (5-year debt) and 210bp (10-year debt). CMT believes that its overall cost of debt will remain stable, with expectations of declining loan spreads offsetting a rising SOR.

• We raise our growth assumptions for 2009 (from no growth to moderate) for CMT’s key assets, impressed by its ability to achieve positive rental reversions. We are also assuming: 1) 20% growth for its hotel business in Raffles City in 2010, in line with our bullish expectations for CDLHT; and 2) much stronger contributions from CRCT in view of its positive YTD performance. Our DPU estimates consequently rise by 2-8% for 2009-11. Rolling our target price forward lifts our DDM-derived target price (discount rate 8.4%) to S$1.74 (from S$1.54).

In-line Q309 DPU of 2.35c