The Behemoth In Retail


We visited CapitaMall Trust (CMT) and key highlights are as follows:

Retail sales have rebounded. 1Q09 performance was disappointing as consumers shied away from shopping malls during the Chinese New Year season. However, shopper traffic and retail sales bottomed out in Feb 09 and picked up in Apr-May 09. Negative growth for retail sales has narrowed. Basic and necessity goods have fared much better than luxury items.

Quality malls attract long-term tenants. Occupancy reached 99.5% in 1Q09, which is impressive as there is little impact from the recession. CMT benefitted from a flight to quality to well-located malls. Core tenants, eg BHG, Cold Storage and NTUC Fairprice, are players with long-term plans for the Singapore market. Renewal and new leases for 169,233sf of space signed in 1Q09 boasted rental rates that were 1.3% higher than preceding rates.

Occupancy remains in the high-90%. We visited Tampines Mall, Plaza Singapura, Bugis Junction, Raffles City, IMM Building and Sembawang Shopping Centre over the weekend. Shopper traffic was heavy. There were no visible vacant shops at the malls, thus giving us confidence that CMT has maintained occupancy in the high-90% going into 2Q09. We are impressed by CMT’s efforts in organising promotional, cultural and educational activities to attract shoppers.

We raise our 2010 and 2011 DPU forecasts by 6.1% and 13.0% to 8.7 and 7.8 cents respectively after factoring in contributions from Jurong Entertainment Complex, which will be completed in 2H11. We also expect occupancy to taper off to 94% (previous: 88%) and retail rentals to correct 12% (previous: 15%). Upgrade to BUY with a target price of S$1.70, based on a dividend discount model (required rate of return: 7.2%, growth: 3.0%).

Flat yields

• Islandwide retail occupancy down marginally. Occupancy of islandwide retail space at 93.4% was down marginally from 93.8% in 4Q08. Retail occupancy in the Orchard and Outside Central areas stayed above islandwide levels.

• Checking out the competition. We visited three of CMT’s competitors recently and conclude that CMT’s malls should be able to stay resilient despite the competition.

• Upgrading our estimates. We are now more positive that the healthy business in CMT’s suburban malls will provide support to rental levels. We change our rent assumptions for most of CMT’s malls to moderate growth of 3-5% for 2010-11, from declines of 5-10%. We also adjust for the number of units in 2009 after the rights issue. Our 2009 DPU estimate drops by 8% while our 2010-11 estimates rise by 12- 25%. Following our changes, our new DDM-derived target price is S$1.26, up from S$0.87 (unchanged discount rate of 9.7%)

• But maintain Underperform. Compared with its peers in the SREIT space, CMT appears fairly expensive at 0.86x P/BV and yields of 6% vs. the sector average of 10.2%. Since its last low of S$1.16 on 28 April, CMT’s share price has appreciated 23.3%. This would be an opportune time to exit a stock with flat yields and a lack of catalysts in the medium term. Maintain Underperform.

On the road

CMT roadshow to KL

We brought CMT to Kuala Lumpur for a non-deal road show last week. Investors’ top concerns were the retail outlook in Singapore, the performance of CMT’s portfolio, and management’s acquisition and asset enhancement plans.

Defining “suburban mall” by location and positioning. Investors expressed concern over upcoming retail supply, particularly in central Singapore. Management pointed out that CMT’s portfolio resilience stems from its primarily suburban assets. The definition of “suburban” should not refer only to physical locations but malls’ positioning i.e. a suburban mall should offer a good selection of mass-appeal and necessity-based retail produces and services including cinemas, supermarkets, music schools and food courts. Plaza Singapura is a centrally located mall which management considers suburban in its positioning for residents in the districts of River Valley, Orchard Road and Mount Sophia. Repeat visits within the week are expected for CMT’s suburban malls due to their proximity to MRT stations and necessity-based offerings as opposed to destination-based malls in the primarily shopping belt. Thus, management does not consider Plaza Singapura to be competing directly with the three new malls that will be opening along Orchard Road over 2009-10. Non-suburban properties in CMT’s stable are limited to four assets: Atrium@Orchard, Raffles City, Funan DigitaLife Mall and Bugis Junction.

Traffic count at Tampines Mall stronger at opening of Tampines One. Despite the strong draw of new-to-market brands such as Uniqlo and Cache Cache Paris at competing mall Tampines One that opened in April, traffic count at Tampines Mall has not been worse off. In fact, within the first week of Tampines One’s opening, traffic at Tampines Mall increased 15% due to its larger number of food outlets and car-park lots.

Confident of renewing leases expiring in 2H09. There are 550 leases accounting for 21.5% of gross rental income which will be expiring in 2009. Almost half will come from IMM Building and Plaza Singapura. Leases due in IMM Building are mainly from offices and warehouses, and management is confident of renewing these leases or securing new tenants as passing rents are below market rates. We estimate current passing gross monthly rents for IMM offices at S$2.91 psf and warehouses at S$1.45 psf.

As for Plaza Singapura, the bulk of the space is taken up by hypermart, Carrefour, whose current lease was secured at the rental lows of 2003. We estimate current gross monthly passing rent for Carrefour at S$5.35 psf. Management is confident that competing malls in the Orchard area will not be able offer the same size at current passing rents. Moreover, if existing tenants decide not to renew, rates from new tenants are highly likely to surpass their rental levels.

Why rights issue? Management explained that although refinancing options are available to CMT, banks are only willing to lend up to three years, representing shortterm solutions. Stretching the current debt for another 2-3 years would result in a new expiry in 2011 or 2012 when significant debt would also be due. (This assumes that convertible bondholders will redeem at the 2011 option date.) Taking the rights issue path would allow CMT to pay down some debt and reduce its gearing. Following its rights issue and assuming immediate pay-down of debt due in 2009, asset leverage should come down to 29.2% from 43.1%. CMT’s long-term leverage will be about 35%.

Organic growth via asset enhancement. Management guides for flat DPU of 8.4cts for 2009-10 as increased contributions from newly enhanced Raffles City and Lot One could be diluted by reduced gross turnover rents and possibly flat reversions. Management intends to commence asset enhancement work at Jurong Entertainment Centre (JEC) at the end of 2009 and Atrium@Orchard at the end of 2010. Capex for both is estimated at S$300m. Prior to commencement, the following will have to be fulfilled: 1) leasing pre-commitments of 50%; 2) construction costs fixed; and 3) financing secured.

Leasing pre-commitments at JEC have been secured from the previous cinema operator, a supermarket as well as a food court. Leases for these anchors will range from three to 10 years. The decision to postpone asset enhancement work at JEC although operations have ceased since Nov 08 was based on expectations of declining construction costs by 2H09, when Singapore’s two Integrated Resorts will be close to completion. For Atrium @ Orchard, management expects approval from the relevant authorities to take another 12-18 months.

Acquisitions. Clients also wanted to find out management’s acquisition plans, particularly for Ion Orchard (jointly owned by sponsor CapitaLand and Sun Hung Kai). Management indicated that a stabilised yield from Ion Orchard will be needed before acquisition, and new malls typically take one year to achieve that. Hence, a more realistic time to acquire Ion Orchard would be after 2H10.

Valuation and recommendation

Maintain Underperform at S$0.87 for now. We came away from the roadshow with more clarity on management’s growth strategy. CMT has a post-rights adjusted P/BV of 0.83x and a forward yield of 6.8%. We maintain our Underperform rating and DDMbased target price of S$0.87 (discount 9.7%) for now. We are reviewing our estimates for a potential upgrade.