Had a good run; downgrade to HOLD

• 4Q14 DPU increased 5.1% YoY
  
• 6.1% rental reversions achieved in FY14
  
• Valuations no longer compelling
  

4Q14 results within our expectations

CapitaMall Trust (CMT) reported its 4Q14 results which came in within our expectations. Gross revenue increased 2.2% YoY to S$165.2m, while DPU grew at a stronger pace of 5.1% to 2.86 S cents. This was driven by contribution from the completed phase 2 AEI at Bugis Junction, distribution of taxable income retained in 1H14 (S$11.2m) and one-off other gain distribution amounting to S$4.5m. For FY14, gross revenue came in at S$658.9m (+3.3%) and matched our forecast. With the exception of JCube, all of CMT’s assets recorded positive revenue growth in FY14. DPU grew 5.6% to 10.84 S cents and formed 98.6% of our estimate.

Improvement in shopper traffic and tenants’ sales in 4Q14

Although shopper traffic dipped 0.9% and tenants’ sales psf pm fell 1.9% in FY14, we note that this was an improvement from the 1.5% and 3.0% decline recorded in 9M14, respectively. We estimate that this translated into positive growth of 0.9% and 1.4% in footfall and tenants’ sales psf pm in 4Q14, respectively, an encouraging sign amid ongoing industry headwinds. CMT also managed to record rental reversions of 6.1% for its portfolio in FY14. This was the fifth consecutive year in which CMT delivered positive rental uplifts of at least 6%. While management acknowledged that this figure is under pressure this year, as was the case in FY14, it will continue to enhance the positioning of its malls and make them relevant to shoppers.

Downgrade to HOLD

We switch our valuation methodology from a RNAV model to a dividend discount model (cost of equity assumption: 7.4%; terminal growth rate: 2%), which is the more commonly used valuation metric within our S-REITs coverage. Our fair value is revised marginally from S$2.20 to S$2.21. CMT was highlighted as one of OIR’s top picks in our Singapore Strategy report dated 2 Dec 2014. Since then, its share price has appreciated 13.6%. FY15F distribution yield has now been compressed to 4.9%, which is below its%. FY15F distribution yield has now been compressed to 4.9%, which is below its 10-year average 12-month forward distribution yield of 5.3%. We believe valuations are no longer compelling, and thus downgrade CMT to HOLD.

Upgrade on valuation

CMT’s 3Q14 DPU was in line with expectations and made up 73% of our fullyear estimate. While organic growth is likely to remain anemic in the nearterm, tenant sales and shopper traffic are seeing some traction, with lower yoy declines. Driving near-term growth would be the new AEI works at Bukit Panjang Plaza and P2 of IMM makeover. Post the recent market weakness, CMT offers an attractive 16% total return, based on our DDM-backed target price of S$2.11. We upgrade our rating to Add from Hold on valuation.

In line set of 3Q numbers

CMT reported 3Q14 revenue and NPI of S$164.6m and S$114.1m, up 2.9% and 3.3% yoy, respectively. Distributable income came in at S$93.7m, translating to a DPU of 2.72Scts. Better performance was largely due to higher revenue from Tampines Mall, J8, Plaza Singapura and Bugis Junction (on completion of its AEI), while J Avenue at IMM opened in Sep 14. Portfolio occupancy was 98.5% while rental reversions averaged +6.3% over the previous period.

Smaller tenant sales and shopper traffic drag

While consumer retail spending remained cautious, shopper traffic and tenant sales performance across CMT’s portfolio gained some traction, down a smaller 1.5% and 3% in the 9M compared to -2% and -3.7% in 1H14, and representing a second consecutive quarter of improvements in these metrics. We expect the rental trend for the remaining 2.9% and 28.1% of rental income to be recontracted in 4Q and 2015 to be modest. Earnings enhancements via AEI would be an increasingly important factor to drive growth going forward. In this regard, commencement of AEI works at Bukit Panjang Plaza, scheduled from 4Q14 to 3Q16, should add to the bottom line. The $18.5m AEI will free up 18k of commercial GFA and generate a projected ROI of 8%. In addition, P2 of

conversion of space into outlet stores at IMM are currently underway. In the medium term, there are plans to evaluate new initiatives at Funan Mall with a view to tap the unutilised 380,000sf of commercial GFA. Balance sheet is strong with gearing at 34.1%.

Upgrade to Add

With the recent decline in share price, CMT is now offering 16% total return to our current target price of S$2.11. At this level, we think CMT is worth a relook and upgrade our call to Add from Hold. Catalysts from stabilisation in tenants’ sales performance and shopper traffic count, as well as accretive AEIs and potential acquisitions in the longer run, should drive share price performance.

No surprises

CMT’s results were within expectations, with 1H14 DPU making up c.48% of our full-year forecast. Although sequentially better, 2Q’s tenant sales and shopper footfall continued to dip yoy. This moderated outlook would mean that organic rental growth potential remains anaemic going forward. In the absence of details any makeover plans at Funan Mall and with only a small new AEI planned at Bukit Panjang Plaza, we think the drivers for share price

performance would have to come from new acquisitions. The balance sheet is strong with a gearing of 34.3%. We maintain a Hold rating with earnings projections unchanged. Our DDM-backed target price is slightly higher at $2.11 as we roll forward our numbers.

Rental renewal growth sustaining at more than 6%

2Q14’s gross revenue grew 2.5% to S$164.3m, lifted by a 6.6% positive rental reversion for its renewal leases and high occupancy of 98.6%, while NPI rose a higher 4.4% on lower property tax and better cost management. The 30%-owned Westgate contributed another S$5.6m of NPI. Distribution income of S$93.4m was up 6.5% yoy and represents a 97% payout ratio, translating to a DPU of 2.69Scts. At half time, the group achieved c.48% of our full-year DPU estimate. The group enjoyed a slight boost in valuation (with the exception of JCube) bringing book NAV to S$1.79/unit.

Cautious consumer spending still

Consumer spending remained cautious, with shopper traffic and tenant sales down 2% and 3.3% yoy respectively, although a tad better than in 1Q14. This modest spending scene would mean that rental reversion upside for the 6.4%/29% of its gross rental income due to be re-contracted in 2H14/FY15 is likely to remain anaemic. CMT plans to start an $18.5m AEI at Bukit Panjang Plaza to free up 18ksf of commercial GFA. This exercise should span over 3Q14-3Q16 with a projected ROI of 8%. Meanwhile, the creation of a 25ksf trendy cluster at J Ave, is underway and 2/3s of the space has been taken up.

Inorganic growth could be catalysts

Catalysts for stock upside would likely have to come from new acquisitions. With a gearing of 34.3% and proceeds from the sale of Westgate Office Tower, its balance sheet is in a strong position.

Cautious consumer spending

CMT’s 1Q14 DPU of 2.6 Sct was in line with expectations at 23% of our and consensus’s full-year estimates. While its portfolio rental reversion of 6.2% suggests that operating metrics remain stable, CMT did report a cautious trend in consumer spending, with shopper traffic and tenant sales down 1.9% and 4.0%, respectively. We think execution on its piecemeal AEIs will increasingly become more important if DPUs are to be sustained. There is also some scope for acquisition growth after the sale of Westgate Office Tower. We tweak our FY14-16 DPU estimates by -1% to 1% and keep our DDM-based (discount rate: 7.5%) target price of S$2.06. Maintain Hold on valuations, with catalysts from accretive acquisitions and upside surprise from AEIs.

Portfolio NPI

CMT’s portfolio gross revenue rose 5.8% yoy in 1Q14, driven by rental reversion of 6.2% yoy (implying c.2% growth in spot rents yoy). Higher occupancy at Plaza Singapura and The Atrium@Orchard and the completion of Phase 1 AEI at IMM Building were the key drivers. However, portfolio NPI growth was lower at 5.5% yoy given higher opex (+7.1% yoy) due to higher property tax at Plaza Singapura, JCube and Tampines Mall. Its 30% stake in the Westgate retail mall (92% occupied) resulted in revenue contribution of S$5.1m.

Slowing tenant sales and shopper traffic

Tenant sales (psf) and shopper traffic declined by 4% and 1.9% yoy, respectively. While CMT’s average tenant occupancy cost of 15.8% as at FY13 is not high compared to its peers, further declines in consumer spending could increasingly limit organic rental growth prospects.

AEI and acquisition growth

CMT plans to embark on 1) AEIs on JCube to reconfigure over 50 retail units and increase F&B offerings, and 2) the next phase of AEI for IMM Building in 2014. Both initiatives should result in higher rents on completion although it is unlikely to significantly lift future DPUs. At an asset leverage of 35.1% (excluding the S$174m proceeds due from the sale of Westgate Office Tower), acquisition growth could be the DPU driver for 2014. We estimate debt headroom of S$470m, assuming 40% asset leverage. Star Vista, a mall owned by its sponsor CMA and valued at S$341m, could be a target.

Sustained growth momentum

• 1Q14 DPU up 4.5% YoY
  
• 6.2% rental reversions achieved
  
• Continued focus on AEIs
  

1Q14 results within view

CapitaMall Trust (CMT) reported its 1Q14 results yesterday. NPI grew by 5.3% YoY to S$114.3m, while amount available for distribution to unitholders rose 9.3% to S$102.4m. We note that S$8.0m cash has been retained for distribution in FY14, and S$5.3m income from CapitaRetail China Trust for working capital purposes. As a result, DPU for the quarter came in at 2.57 S cents, 4.5% higher than that achieved in 1Q13. This met 23.4% of both ours and consensus full-year DPU projections.

Healthy operating metrics

The better performance was driven mainly by higher occupancy at Plaza Singapura and Atrium@Orchard, and completion of Phase 1 asset enhancement initiative (AEI) at IMM Building. There was some softness in the portfolio shopper traffic and psf tenant sales, which saw a decline of 1.9% and 4.0% YoY respectively over the quarter. However, leasing activity remained sanguine, with 172 leases or 427,276 sqft NLA renewed at rents 6.2% higher than previously contracted rates. For the rest of 2014, 12.8% of CMT’s gross rental income is due for renewal. Portfolio occupancy as at 31 Mar improved 0.3% QoQ to 98.8%, boosted by Westgate mall which registered 92.0% occupancy versus 85.8% when it commenced operations in Dec 2013 (S$3.3m NPI contribution in 1Q14). Given that Westgate Wonderland has recently opened and Kids Club is targeted to open in 2Q, we believe performance at Westgate is set to improve further.

Maintain BUY

Looking ahead, CMT will continue to focus on executing its AEIs at Bugis Junction and Tampines Mall. In addition, it will also embark on Phase 2 AEI at IMM Building and reconfigure Level 2 of JCube to increase the retail offerings and enhance the shoppers’ experience. We are making minor adjustments to our forecasts except incorporating the FRS111 Joint Arrangements accounting principle into our model. Maintain BUY with unchanged S$2.20 fair value on CMT.