CMT’s rights issue over-subscribed

CAPITAMALL Trust (CMT), Singapore’s largest real estate investment trust by market capitalisation, yesterday said that its $1.23 billion rights offer was over-subscribed based on initial tallies at the close of the rights offer on March 25.

‘Acceptances and excess applications have been received for more than the total number of rights units offered pursuant to the rights issue,’ CMT said in a filing to the Singapore Exchange.

The trust did not provide details of the amount of the oversubscription. Parent company CapitaLand similarly said on March 13 that its $1.84 billion rights issue had been over-subscribed.

CMT shares gained 16 cents, or 12.5 per cent, to close at $1.44 yesterday amid a broad gain in the market. The benchmark Straits Times Index closed 4 per cent up at a two-month high.

CMT on Feb 9 announced the $1.23 billion rights issue in a 9-for-10 rights offer. The trust, which is 29.7 per cent owned by CapitaLand, said that it will use most of the proceeds to pay off $956.2 million of debt due this year.

The balance will be used to pay for asset enhancement initiatives as well as for general corporate and working capital purposes. The rights issue will also reduce CMT’s gearing from 43.2 per cent to 29.1 per cent.

In a report earlier this month, UBS Investment Research forecast an 8.3 per cent distribution per unit (DPU) yield for CMT this year – even on conservative assumptions, which included signing rents in suburban and central areas falling 8 per cent and 18 per cent respectively in 2009 as well as a 10 per cent rental rebate for central area malls.

‘We maintain our ‘buy’ rating as CMT is relatively defensive with 50 per cent of its portfolio in suburban malls, and there is little doubt on its capital structure.’

FairPrice sub-underwrites CapitaMall rights issue

It will take up to 27m rights units if issue is not fully subscribed

SINGAPORE’S largest supermarket chain NTUC FairPrice has agreed to spend as much as $22.1 million to buy up to 27 million rights units in CapitaMall Trust (CMT) if the issue is not fully subscribed.

The sub-underwriter arrangement comes under a standby purchase agreement. The 27 million units represent about 1.8 per cent of the rights units that have been offered by CMT and, if fully allocated to NTUC FairPrice, will raise its substantial stake from 6.35 per cent to 7.3 per cent. This also assumes that the groceries retailer fully subscribes for its own entitled rights shares.

As a sub-underwriter, NTUC FairPrice will receive a fee of $332,100, or 1.5 per cent of the price for the 27 million rights units.

The standby purchase agreement was inked between NTUC FairPrice and the joint lead managers and underwriters.

CMT said that the commission that NTUC FairPrice earns is part of the commission paid to the joint lead managers and underwriters – DBS and JPMorgan.

Early last month, CMT announced a nine-for-10 rights issue to raise $1.23 billion.

The 1.5 billion units are to be issued at 82 cents apiece. Most of the funds raised would be to repay borrowings, CMT had said.

NTUC FairPrice has been a substantial unitholder of CMT since the trust was listed in 2002.

The supermarket was set up by unionists in the 1970s to ‘help moderate the cost of living for low income households in Singapore’, its website said.

NTUC FairPrice’s group net profit after contributions for the year ended March 31, 2008, fell 23.8 per cent to $63.3 million from $83.1 million. This followed higher contributions to Singapore Labour Foundation.

Total cash in its coffers stood at $290 million as at end-March 2008, compared with $224 million a year earlier.

CapitaLand, CMT need attractive buys to justify rights issues

CASH is king these days, but does any company really need to hold on to $6 billion of it?

CapitaLand, Singapore’s largest property company by market capitalisation, last month announced a fully underwritten one-for-two rights issue to raise $1.84 billion. The developer is in no way hard-up for money – CapitaLand has some $4.2 billion of cash and cash equivalents on hand. After the rights issue, it will have a whopping $6 billion in the kitty.

So was the rights issue really necessary? CapitaLand said that the exercise was ‘pre-emptive’ and that it will provide the company with greater financial capacity to pursue merger and acquisition opportunities that might arise, as well as other investment opportunities. Chief executive Liew Mun Leong also told analysts and media at a briefing on the day the rights issue was announced that there were ‘a number of proposals on the table’ that the developer was studying.

Analysts have been mostly positive on the rights issue, issuing a slew of fresh ‘buy’ calls that sent CapitaLand’s stock soaring 11.4 per cent after the announcement of the issue. And sources have since told BT that the take-up for the sharply discounted rights issue has been good so far, which means that shareholders, at least, are willing to be supportive.

But there is no denying that the rights issue is dilutive. A day after the rights announcement, Goldman Sachs lowered its 2009 and 2010 earnings per share (EPS) estimates by 37 per cent and 33 per cent, respectively, to reflect the dilutive impact.

To justify the dilution, CapitaLand has to show that it raised the money for a good reason by making some attractive buys in the not-too-distant future. The rights issue does make the company more financially secure, of course. Other than increasing its war chest to $6 billion, the issue will also reduce CapitaLand’s net gearing to 0.28 times from 0.47 times. But these factors alone are not enough to justify asking shareholders for $1.84 billion, especially at a time when investors themselves are looking to conserve capital.

The same principle applies for CapitaLand’s 29.7 per cent-owned retail trust CapitaMall Trust (CMT), which on the same day as the announcement of its parent’s rights issue said it will raise $1.23 billion in a 9-for-10 rights offer. The market, and analysts, didn’t take this – and the much larger dilution – as well as they did with CapitaLand’s issue, sending CMT’s shares down 6.2 per cent even as CapitaLand’s shares shot up.

‘While widely expected, we believe the rights issue (50 per cent of market cap) was larger and more dilutive than expected,’ said UBS Investment Research. The firm downgraded CMT’s earnings per unit and dividend per unit forecasts by 30-50 per cent post-rights, also taking into account lower net property income, higher interest costs and the repayment of convertible bonds in 2011.

CMT intends to use the bulk of the proceeds to pay off $956.2 million of debt due this year, and reduce its gearing from 43.2 per cent to 29.1 per cent. However, the repayment could have been achieved by refinancing loans, rather than asking investors to fork out another $1.23 billion.

One reason for the fund raising is that by lowering its gearing, the trust will be in a better position to raise funds in future when it needs to make an acquisition. Lim Beng Chee, chief executive of CMT’s manager, said that the trust chose to go with a rights issue rather than look for refinancing for its loans as it was looking at the ‘longer-term’.

But for both CapitaLand and CMT, those vague hints of acquisitions need to be translated into real deals to justify asking shareholders for so much money.

CapitaLand rises, CMT falls after rights issues

CAPITALAND and its listed retail trust CapitaMall Trust (CMT) announced massive rights issues on Monday.

But while CapitaLand’s $1.84 billion one-for-two rights issue has been well-received by analysts and the market, CMT’s $1.23 billion nine-for-10 rights offer has not fared as well.

Analysts rushed to issue ‘buy’ calls on CapitaLand after the developer said it was raising money to boost its war chest to $6 billion as it searches for acquisitions. CMT, on the other hand, was criticised for an ‘unwarranted dilution’.

The market seemed to agree yesterday. CapitaLand shares gained 11.4 per cent or 27 cents, to close at $2.63. But CMT lost 6.2 per cent or nine cents to close at a one-year low of $1.36.

Merrill Lynch upgraded CapitaLand to ‘buy’ from ‘underperform’, while OCBC Investment Research upgraded it to ‘buy’ from ‘hold’. CLSA, Kim Eng, UBS Investment Research and UOB-Kay Hian all reiterated ‘buy’ calls too.

‘We believe the cash raised provides CapitaLand with the financial flexibility to ride through challenging property markets, enhance market positioning and, more significantly, the ability to take advantage of opportunistic acquisitions,’ Merrill said.

A few firms were less bullish. Citigroup, CIMB and Nomura maintained their respective ‘sell’, ‘underperform’ and ‘reduce’ recommendations. Citigroup said the rights issue will be a drag on CapitaLand’s return on equity.

Goldman Sachs, which has a ‘neutral’ call on the company, said the rights issue is sufficient to address investor concerns over book value erosion from land bank provisions and associated asset value declines (from listed trusts), which Goldman estimates could be around $1.9 billion spread over the next two or three years.

‘With the sizable rights offering, we see no further need for capital raising in the next two years into the downturn, as the company has said it plans to revisit project commitments,’ said Goldman analysts Paul Lian and Natasha Parchani.

A successful rights issue would refocus attention on CapitaLand’s capacity to benefit from the current market environment as it is more likely than its peers to generate net asset value growth in the next two or three years, the analysts said.

Reviews for CMT’s $1.23 billion rights issue were more mixed. The trust intends to use the bulk of the proceeds to pay off $956.2 million of debt due this year.

CLSA downgraded CMT from ‘outperform’ to ‘underperform’. In contrast, OCBC upgraded the stock from ‘hold’ to ‘buy’.

‘While the proceeds will help the company repay debt and lower gearing to 29.1 per cent (from 43 per cent currently), we see the rights issue to be rather value dilutive,’ said CLSA analyst Yew Kiang Wong. The cost of retired debt, at 3.4 per cent, is much lower than the cost of equity, CLSA noted.

But OCBC analyst Foo Sze Ming said the rights issue is not driven by refinancing issues and is instead for the ‘long-term sustainable growth of CMT’s portfolio’.

‘By paring its gearing level now, CMT will have better financial flexibility to take on opportunities for asset enhancement initiatives and acquisitions in future,’ Mr Foo said.

Gearing concern removed; Upgrading to BUY

Rights issue at steep discount. CapitaMall Trust (CMT) yesterday announced that it will be doing a 9-for-10 rights issue at an issue price of S$0.82 per rights unit. Issue price is at a steep discount of 43.4% to its closing price of S$1.45 prior to the trading halt. Approximately 1.5b units will be offered, raising gross proceeds of S$1.23b from the exercise. This rights issue came as no surprise as we had already previously stated our view that a balance sheet recapitalization may be needed for CMT. Of the proceeds raised, S$956.2m will be used to repay the borrowings due in 2009 and the estimated remaining amount of S$246m (less estimated issue expenses) will be used for asset enhancement initiatives (AEI), general corporate and working capital purposes. After the rights issue, CMT’s gearing will reduce from 43.2% to 29.1%.

Positioning for long term sustainable growth. Given its A2 credit rating by Moody’s and portfolio of quality assets, we do not think that the rights issue exercise is driven by refinancing issues. Instead, we believe that the purpose of the rights issue is for the long term sustainable growth of CMT’s portfolio. By paring down its gearing level now, CMT will have better financial flexibility to take on opportunities for AEIs and acquisitions in future.

Strong support from sponsor. As a demonstration of support for CMT’s rights issue, CapitaLand has agreed to subscribe for its proportionate rights units and also to subscribe for the excess rights units that are not validly subscribed, subject to a maximum total subscription limit of 60% of the total rights units.

Revising down our FY09-10 DPU forecasts. Taking into consideration the dilution impact of the rights issue, we are now revising down our FY09 DPU forecast by 37.3% from 14.5 S-cents to 9.1 S-cents. Our FY10 DPU forecast has also been revised down by 37.8% from 15.1 S-cents to 9.4 Scents. Upgrading to BUY. There is no change to our RNAV estimate of S$1.94 per share, but we are lowering our RNAV discount from 20% to 15% after our gearing concern has been removed. As such, our fair value of CMT has now been raised from S$1.55 to S$1.65 and our ex-rights fair value will fall to S$1.26. As there is a potential upside of 13.5%, we are upgrading CMT from HOLD to BUY.