Signs of decline

• DPU in line, gross turnover down. 1Q09 results were in line with Street and our expectations. Total distributable income of S$62.6m excludes S$5.9m of revenue which has been retained. 1Q09 DPU of 1.97cts fell 43.4% yoy to form 24% of our forecast for FY09. The yoy decline was due to more units as a result of its rights issue. Gross revenue of S$134.5m was up 11.1% yoy on new contributions from Atrium@Orchard and the completion of asset enhancement initiatives in various malls. Qoq, gross revenue was flat due to a 3.4% qoq decline in gross turnover (all categories affected) as well as a slowdown in reversions.

• Reversion rates slowing. While portfolio occupancy had remained stable at 99.5%, reversions showed the first signs of slowing. Based on 125 leases renewed in 1Q09, average rentals grew 1.3% over preceding rates (typically committed three years ago). This represents an annual growth of 0.4%, below the 6-year average annual growth of 3.2%.

• Asset enhancement for JEC and Atrium still under review. Plans for the asset enhancement of Jurong Entertainment Centre and Atrium@Orchard are still under review. Subject to market conditions and regulatory approvals, work could start at the end of 2009 for JEC and end of 2010 for Atrium.

• No changes to our forecasts; downside risks remain. For the rest of 2009, we expect CMT’s portfolio occupancy to stay rather stable, anchored by its well-located suburban malls. However, with leases accounting for more than 50% of its rental revenue expiring over 2009-10 (21.5% in 2009 and 36.4% in 2010) and possibly worsening unemployment and retail sales, downside risks for rents remain. Maintain Underperform and target price S$0.87, still based on DDM valuation (discount 9.7%).

CMT Q1 distributable income climbs 8%

This is after addition of one property to its portfolio and completion of improvements at two others

CAPITAMALL Trust (CMT), Singapore’s biggest property trust, said that its first-quarter distributable income climbed 8 per cent after it added one property to its portfolio and completed improvements at two others.

Distributable income rose to $62.6 million for the first three months of 2009, compared with $58 million a year earlier.

But distribution per unit (DPU) fell to 1.97 cents from 3.48 cents a year ago as the trust did a rights issue in Q1. The proceeds of $1.2 billion from the rights issue will be used to repay borrowings due in 2009.

The trust said that rental renewal rates in Q1 2009 saw a moderate growth of 1.3 per cent over preceding rental rates. Based on committed leases as at March 31, 2009, the trust’s gross revenue locked-in for 2009 exceeds 90 per cent of gross revenue for the whole of 2008. But despite this, CMT is cautious on its outlook.

‘The revenue outlook for CMT will depend on the extent, depth and duration of the economic recession and financial uncertainties on CMT’s tenants as well as new demand for retail space,’ said Lim Beng Chee, chief executive of the trust’s manager.

Retail sales in Singapore fell for the fifth straight month in February, easing 5.7 per cent, official data released recently showed. CMT yesterday reiterated that it is managing its costs and working closely with tenants to ‘align the trademix promptly in line with the environment’.

‘We also have in place a slew of measures to help our tenants, ranging from restructuring of leases, reviewing of space efficiency to working with tenants on various promotional fronts,’ said Mr Lim.

The trust’s Q1 2009 net property income rose 9.1 per cent to $92.4 million, from $84.7 million in Q1 2008, mainly from the acquisition of The Atrium@Orchard and completion of asset enhancement initiatives at Sembawang Shopping Centre and Lot One Shoppers’ Mall. Gross revenue rose to $134.5 million, an increase of 11.1 per cent over Q1 2008.

CMT also said it is currently in talks with the authorities to optimise the integration plan for The Atrium@Orchard and Plaza Singapura, and aims to start work by end-2010, subject to market conditions and approvals from the relevant authorities. The trust also plans to start enhancement works at Jurong Entertainment Centre by the end of the year, it added.

CMT’s revenue was in line with expectations, said Kim Eng analyst Wilson Liew, who issued a fresh ‘buy’ call on the stock yesterday. ‘Its portfolio that is geared towards necessity spending should provide more resilience under current economic conditions. Its balance sheet has been substantially strengthened following the rights issue,’ he noted.

CMT shares gained one cent to close at $1.30 yesterday.

Normalized, Finally

Less attractive risk-reward proposition

Flat QoQ revenue growth in 1Q09. For 1Q09, CapitaMall Trust (CMT) reported gross revenue growth of 11.1% YoY or flat QoQ to S$134.5m. Net property income increased by a smaller 9.1% YoY and 7.5% QoQ to S$92.4m due to higher operating expenses from the acquisition of The Atrium and the opening of the Sembawang Shopping Centre. Unrealised forex loss of S$11.4m was recognized on the translation difference of syndicated loan but had no impact on cashflow. Reported balance sheet had not taken into account the Rights issue and the post-Rights issue balance sheet is likely to have a net gearing ratio of 29.2%.

Expecting further downside in retail rents. Conditions in the retail scene deteriorated further in 1Q09. Within CMT’s portfolio, only tenants in trade sectors such as supermarket, books & stationery, department stores and beauty and health related sectors experienced increase in consumer spending. Some of the trade sectors that have been perceived defensive and performed well in 4Q08, such as food & beverages sectors experienced turnover decline in 1Q09. With the recent downgrade of Singapore 2009 GDP growth to -6% to -9%, we are seeing increasing risk of further deterioration in consumer spending in the coming quarters. Declining turnover would translate to higher occupancy costs for tenants and this raises more doubt over the sustainability of high rental rates going forward. As such, we are now forecasting rent decline of -10% (from -5%) for CMT’s retail portfolio.

Downgrade to HOLD. Our revised DPU estimates have been lowered to 9 S-cents for FY09 (previously 9.1 S-cents) and 9.3 S-cents for FY10 (previously 9.4 S-cents). Risk-reward proposition may not look as attractive as before, with the worsening outlook and the recent increase in share price. Nevertheless, CMT has already locked in 90% of FY08 gross revenue (~S$460m) for FY09 and this will provide strong DPU visibility for FY09. Our fair value estimate has now been lowered to S$1.21 (previously S$1.26). CMT is now trading at our estimated FY09 DPU yield of 7% and for 1Q09, it will be distributing 1.97 S-cents to unitholders (annualized yield: 6.2%). While CMT has retained S$3.3m of taxable income (exclude CRCT distribution) in 1Q09, it is still committed to pay out 100% of its taxable income to unitholders for FY09. For now, we see limited share price upside and with no near term catalyst in sight, we are downgrading CMT to HOLD.

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A shopper’s best friend
The largest landlord of retail malls in Singapore, CapitaMall Trust (CMT) offers exposure to many well-frequented malls across the four corners of Singapore. Its properties are well-located in the suburbs and even downtown, each catering to a sizeable catchment area of shoppers. CMT was the first REIT to be listed in Singapore in 2002.

Ahead of its peers
Since then, CMT has proven to be an innovative landlord, pioneering the art of asset enhancement initiatives (AEIs) to optimise space and rentals. AEIs will underpin CMT’s organic growth for the next three years at least. CMT historically trades at an average yield spread of 2.9% over the 10- year bond yield. Its current yield spread of 4.8% implies ample upside for the share price. In fact, it is still cheap relative to its own yield band of between 3.6-11.5%.

Shopping is a way of life here!
Other than Raffles City, CMT’s malls are largely located in the suburbs, catering to necessity shopping. Even Plaza Singapura that is located at the end of Orchard Road is positioned more as a neighbourhood mall, with hypermart Carrefour as the anchor, than high-end malls. CMT’s portfolio of malls has consistently achieved high occupancy rates of over 99% since 2001, with an estimated average retail passing rent of $11.80 psf per month.

Plenty of room to grow
Following the 9-for-10 rights issue to raise $1.2b, CMT will be using part of the proceeds to repay $956m of debt due in 2009, thus bringing down its gearing from 43% to 29%. Most of the balance of the proceeds will be used for the AEIs at Jurong Entertainment Centre and the Atrium@Orchard. CMT is also exploring opportunities to increase the retail GFA of Funan DigitalLife Mall and Tampines Mall.

A true industry leader
We like CMT for its market leader position, strong quality of assets, healthy balance sheet and its strong sponsor, CapitaLand. In difficult times like these, CMT’s vast potential for organic growth and earnings resilience has and will continue to deserve a premium to its peers. Initiating coverage with a BUY, a target price of $1.53.