Still pricey

• Maintain Underperform. CMT has good exposure to retail malls in suburban Singapore as well as the downtown core of Singapore which are traditionally resilient to economic slowdowns. Nonetheless, strong upcoming supply in the central area, slowing visitor arrivals and a global economic slowdown are likely to hurt the retail business, particularly in the Orchard Road precinct. The ability to increase rents through asset enhancements may weaken on these accounts, although we are not expecting CMT’s occupancy levels to weaken substantially from current near-full levels. On the other hand, the decision to continue with the integration of Plaza Singapura and Atrium@Orchard may result in much higher capital expenditure, affecting CMT’s free cash flows.

• Unchanged DDM-derived target price of S$1.90 (discount rate 9.7%). CMT’s P/BV of 0.9x with forward yields of 6.9% still makes it expensive compared with its closest peer, FCT’s 0.59x with yields of 10.1%. Maintain Underperform in view of a weakening macroeconomic outlook.

Rough times ahead

• Performance on track. 3Q08 results were in line with Street and our expectations. DPU of 3.64cts for the quarter grew 7.1% yoy to form 26.3% of our forecast of 13.9cts for FY08. This excludes S$1.6m of revenue received from CRCT which has been retained for distribution in 4Q08. Gross revenue of S$129.7m was up 13.3% yoy on new contributions from Atrium@Orchard and the completion of various asset enhancement initiatives (AEI) in various malls. YTD DPU forms 76.8% of our full-year estimate, in line. Additionally, management remains committed to distributing the S$5.5m retained in 1Q08 in 4Q08.

• AEI and acquisition updates. Management revealed that planned AEI initiatives for Jurong Entertainment Centre, Funan DigitaLife Mall and Tampines Mall have been put on hold due to high construction costs although AEI for Atrium@Orchard and its integration with Plaza Singapura are expected to proceed on track, subject to official approval.

• Changes to assumptions. CMT has performed well thus far despite weakening global economic conditions. Nonetheless, a deepening global and domestic recession is expected to weaken rental reversion possibilities going forward while the global credit crunch will make debt availability for new acquisitions difficult. On this, we remove our earlier forecasts of acquisitions for Ion Orchard, Clark Quay and Vista Xchange, and drop our rental growth forecasts to 0-2% for FY09 and -10% for FY10, down from 3-15% growth expectations earlier. We also forecast a 1% drop in occupancy by 2010 for downtown malls which would be facing more competition from new supplies. Separately, we increase our associate contribution forecasts on strong YTD performances and higher cost of debt assumptions for FY09 onwards by 70bp.

• Downgrade to Underperform from Neutral; lower target price of S$1.90 (from S$3.64). Following the above various adjustments, our DPU estimate for FY08 increases by 3%, while our FY09-10 estimates decrease by 5-25%. Accordingly, our DDM-derived target price (discount rate 9.7%) drops to S$1.50 from S$3.64. Downgrade to Underperform in view of a weakening macroeconomic outlook.

Enhancements put on hold

Story: 3Q08 revenue and NPI grew by a similar 13% yoy and 3% qoq to $129.7m and $86.9m respectively, thanks to organic growth and new contributions from Atrium. Excluding Atrium, topline would have grown 10% yoy. The group plans to distribute 97.5% of income amounting to $60.8m, translating to DPU of 3.64cts.

Point: During the quarter, leases were renewed at 9.3% higher than preceding levels. Occupancy remained at a high 99.7% while tenant retention rate averaged about 79.6% YTD vs 82.4% in 2007. CMT continues to provide good earnings visibility going forward. A portion of the 31% of portfolio rental income scheduled to be reviewed in 2009, have been locked in through pre-commitments at SSC and Lot One, where enhancement works are anticipated to complete by end 08. As a result, current locked-in revenue for 2009 exceeds 83% of 2008 annualised gross revenue. In view of the tight resource environment and high construction costs, the group
intends to put on hold AEI at JEC and FIT and Tampines office extensions. Refinancing issues are being addressed with sufficient funding capacity to meet financing needs till June 09 and plans to refinance the remaining $680m debt due Aug 09 is in progress.

Relevance: Notwithstanding CMT’s diversified and resilient portfolio of suburban malls, we have lowered our FY09 DPU forecast to 14.5cts to adjust for a slower pace of rental growth and assumed higher vacancy levels in view of the moderation in economic activities. With the deferment of redevelopment projects, we have lowered our DCF to $2.63. Our price target of $2.42 is pegged at parity to RNAV of $2.42. Maintain Hold.

Slowing reversionary growth in 3Q08

Slowing reversionary growth. CapitaMall Trust (CMT) reported a soft set of 3Q08 results. Revenue grew 3.3% QoQ to S$129.7m and the increase was largely attributed to the contribution of S$3.3m from Atrium@Orchard. New and renewal leases contributed just S$0.8m to the quarterly increase in 3Q08. Slowing rental renewal was further evidenced from the decline in the % increase in current rental rates against preceding rental rates between 2Q08 (9.9% increase for 6m08) and 3Q08 (9.3% increase for 9m08), implying that reversionary growth had slowed QoQ. DPU of 3.64 S-cents was announced for 3Q08, translating to an annualized yield of 6.9% base on yesterday’s closing price.

Keeping watch on debt refinancing. No refinancing was done in 3Q08 but management assured that CMT has sufficient cash and bank facilities to refinance its borrowings due in December 08 (S$187.5m) and May 09 (S$80m). However, the lack of investor appetite for medium term notes (MTN) means that CMT is unlikely to be able to draw down on its untapped MTN facility for refinancing purposes unless sentiment changes for the better. While this may have raised more uncertainties on the refinancing of the S$673.7m of borrowings due in August 2009, CMT still has a buffer period of 10 months to seek refinancing.

AEIs put on hold. CMT has also announced that it will be putting on hold its asset enhancement initiatives (AEI) for Funan DigitaLife Mall, Tampines Mall and Jurong Entertainment Centre due to the high construction cost and competitive market for resources. In light of the current tight credit market condition, we see these delays as a positive move by CMT not to overstretch its financial resources and affect its credit rating at a time when its credit health and refinancing should be the priority. AEI for Atrium@Orchard still remains on track and is now waiting for approval from authorities.

Fair value lowered to S$2.57. With further evidence of slowing rental reversion, we are now cutting our rental growth to 0% for FY09 and FY10, but we maintain our view on the defensiveness of retail REITs. As such, our FY09 and FY10 DPU forecasts have been lowered to 16.2 and 17.1 Scents, respectively. Also factoring in the decline in the share price of CapitaRetail China, our fair value of CMT has been lowered from S$3.05 to S$2.57. Current share price still provides an upside of 21.8% and we maintain our BUY rating on CMT.

CMT puts works at three malls on hold

Trust’s fundamentals strong, rents not likely to bottom out

CAPITAMALL Trust (CMT) yesterday said that it will put upgrading plans for some of its properties on hold because of high construction costs.

Singapore’s biggest property trust also said that its third-quarter distributable income rose 14.2 per cent to $60.8 million, from $53.2 million a year earlier, as contributions kicked in from new acquisition The Atrium. Q3 distribution per unit (DPU) rose to 3.64 cents a share, from 3.4 cents a year earlier. Net property income rose 13.1 per cent to $86.9 million, from $76.8 million in Q3 2007.

The earnings were in line with expectations, analysts said. The news pushed CMT shares to their highest level in more than two weeks. The stock rose as much as 16 cents or 7.8 per cent to $2.21 before ending the day at $2.11.

Looking ahead, CMT will be cautious, will review new commitments carefully and will not sacrifice liquidity for new projects, said Lim Beng Chee, chief executive-designate of the trust’s manager. For now, enhancement programmes that have not started at three malls – Funan DigitaLife Mall, Tampines Mall and Jurong Entertainment Centre (JEC) – have been put off. Works at JEC were projected to cost about $170 million.

The trust’s fundamentals are strong as rents are not expected to bottom out in the next few quarters, said Pua Seck Guan, CMT’s outgoing chief executive. So far this year, CMT has renewed 289 leases – which make up 15.4 per cent of total net lettable area – at a 9.3 per cent increase to preceding rental rates. There is also a $12.2 million projected increase in net property income from ongoing asset enhancement works.

Analysts agreed with Mr Pua. Singapore’s retail sector remains resilient, as evidenced by CMT’s latest results, Macquarie Research Equities analysts said in a note yesterday. ‘CMT remains one of our top Singapore Reit (real estate investment trust) picks, with growth from active leasing, asset enhancements and acquisitions,’ it said. Citigroup also issued a ‘buy’ call on CMT, citing its steady income stream.

CMT has already secured refinancing for $187.5 million and $80 million of loans due in December 2008 and May 2009 respectively and is in the midst of negotiating refinancing for $673.7 million due in August 2009. Both the trust and analysts are confident funding will be secured.

‘CMT exists within the enlarged CapitaLand group, and the group as a whole is well supported by local and foreign banks,’ said UOB Kay Hian analyst Jonathan Koh. Earlier this month, CapitaLand said that with its various listed entities, it has raised more than $5 billion of debt year-to-date. In May this year, the trust raised its target asset size to $9 billion by 2010, from an earlier forecast of $8 billion. CMT agreed in May to buy The Atrium along the Orchard Road shopping belt for $839.8 million, boosting its assets to $7.2 billion at June 30.

Yesterday also marked Mr Pua’s last results briefing at CMT’s helm. He quit in September to pursue personal interests. His resignation is a ‘big loss’ and could threaten the group’s ability to grow in the longer term by acquiring under-utilised assets, said Citigroup analyst Wendy Koh. ‘However, his departure is unlikely to affect the rental income stream from existing portfolio and major asset enhancement pipeline for existing properties,’ she added.

Mr Lim acknowledged that Mr Pua has left ‘big shoes’ to fill, but is confident that the management team can fill them.