First look

CMT’s 3Q09 highlighted a slip in gross and net income in the group’s core mall portfolio. Excluding Raffles City, gross income from its retail malls fell 0.6% q-q as negative reversions took hold. Rising retail supply and continued cautious consumer spending will weigh on the outlook for rents, in our view, with some 36.2% of CMT’s leases up for renewal (by gross income) in 2010. With shares trading at 1.1x P/B, we retain our REDUCE rating. Price target S$1.28/unit.

Core mall rents slipping

CapitaMall Trust’s Q3 distributable income up 23% to S$74.9m

CapitaMall Trust (CMT) said on Thursday that its distribution per unit (DPU) for the third quarter stood at 2.354 cents.

This is a 23 per cent improvement over the 1.91 cents DPU, for the same period last year after adjusting for a rights issue.

Moreover, its distributable income for the third quarter was S$74.9 million – a 23.3 per cent on-year improvement. Its net property income also rose 8.8 per cent to S$94.52 million.

CMT said the better performance came on the back of higher lease and rental renewal rates. It also said that its acquisition of “The Atrium@Orchard” and the completion of asset enhancement initiatives at Sembawang Shopping Centre boosted its revenue.

Looking ahead, it noted that the economic activity will probably remain below pre-crisis levels in the near term, even though a modest recovery is underway.

However, the company expects its large and diversified tenant base to provide a firm support for occupancy rates and rental revenue at its shopping malls.

For the next two quarters, CMT said retail sales are expected to be supported by festive spending.

Earlier this year, CMT launched a rights issue to raise S$1.23 billion.

Operating environment still weak; AEI plans articulated

CMT reported 3Q09 DPU of 2.35cts (-35% YoY, +10% QoQ), with 9M09 DPU of 6.45cts making up 72% of consensus estimates. Approximately S $2.5m of distributable income from CRCT has been retained in addition to the S$4.8m in 1H09 (around 0.23cts in total) which will be distributed in 4Q09. On a comparable mall basis, revenue and NPI rose 3.6% and 6.4% respectively. Based on committed leases, locked-in revenue for FY09 is around 104% of FY08’s. Portfolio occupancy remains high at 99.6%. Balance sheet has been strengthened with gearing conservative at 30.4%.

While sentiment and consumer confidence have improved in the quarter, the operating environment remains relatively weak. CMT achieved higher rental reversions in 3Q09 (+2.3% over preceding rents compared to 1.5% for 1H09) although YTD reversions were relatively muted (+1.8% compared to 7-14% over the past 6 years). Shopper traffic and portfolio gross turnover dropped YoY and on a sequential basis; shopper traffic declined 3.2% YoY and 2.4% QoQ while GTO fell 2.5% YoY and 0.5% QoQ. Consumer spending also remained cautious with only 4 out of 18 trade categories reporting YoY growth in turnover.

Mmgt has articulated AEI plans for Raffles City. A new underground link at B2 will be created to provide connectivity between Esplanade MRT station to City Hall MRT station via Raffles City B1 Marketplace. A shopping area at B2 will be created as an extension to the current retail offering while the current B1 will be reconfigured to provide access to and from both MRT stations. This will result in an incremental 16,285sf of NLA (+36%) and a corresponding S$2.65m increase in NPI representing an 8% ROI based on capex of S$33.2m. Completion is expected in 4Q10.

No bargain

What has changed?

• CapitaMall Trust (CMT) announced its 3Q09 results on 22 October 2009. Its net-property income (NPI) of S$94.5m and distribution per unit (DPU) of 2.35¢ were both 1.2% above our forecasts.

Impact

• Gross revenue was 1.7% higher than our forecast, due to better-than-expected contributions from Raffles City and other assets. Lease renewals and signings for 3Q09 were done at an average of 2.3% above preceding rents, slightly above the average increase of 1.5% for 1H09. The market has recovered slightly, but we still regard leasing conditions as sluggish. CMT’s shopper traffic dipped by 3.2% YoY and 2.4% QoQ. The manager attributed the quarterly decline to the opening of ION Orchard. Management’s tone was still cautious about asset enhancement initiatives (aside from those planned for Raffles City and Jurong Entertainment Centre) and the bidding for the public-housing mall in Clementi.

• We have not changed our assumption that the CMT portfolio will face an average rental reversion of -1.5% for 2010, remain flat for 2011, and recover to an average rental reversion (over preceding rents) of 6% for 2012. After finetuning our assumptions, we have revised up our DPU forecasts by 0.5% for
FY09, 1.0% for FY10, and 1.5% for FY11.

Valuation

• We maintain our six-month target price of S$1.54, based on our RNG valuation (a finite-life Gordon Growth Model), which assumes an effective portfolio cap rate of 6.2% (about 50 basis points above CMT’s prevailing cap rate). On our revised estimates, CMT trades at a 12-month forward yield of 5.1%, the lowest in the Singapore real-estate investment trust sector. CMT’s NAV as at 30 September was S$1.57.

Catalysts and action

• We maintain our 4 (Underperform) rating for CMT. It offers a liquidity premium for yield-starved investors, but compared with other S-REITs, CMT provides neither an attractive yield or value, in our opinion.