Small boost to revenue

• 1Q14 revenue rose 5.8% YoY to SGD164.7m on AEI completion and positive rental reversion.
  
• Possible tenant cannibalisation in Jurong East with IMM and JCube seeing QoQ drop in occupancy of 80bps and 70bps.
  
• Maintain HOLD with DDM-derived TP unchanged at SGD2.05.
  

Results in line with expectations

CMT reported a 5.8% YoY increase in 1Q14 revenue to SGD164.7m, with DPU rising 4.5% YoY to 2.57 cts. Revenue was boosted by the completion of asset enhancement initiatives (AEIs) at IMM and Bugis Junction last year and a 6.2% positive rental reversion for leases renewed in 1Q14. CMT still has about 12.8% of gross rental income up for renewal for the rest of the year. The all-in-financing cost for 1Q14 averaged 3.5% (4Q13: 3.4%) with debt maturity of four years (4Q13: 3.6 years). Westgate is making good progress with 92% occupancy (4Q13: 85.8%), but we think there may be mild cannibalisation in Jurong East with occupancy at IMM and JCube seeing a QoQ drop of 80bps (98.2%) and 70bps (99.3%), respectively. Portfolio-wise, 1Q14 shopper traffic slipped 1.9% YoY to ~49m while tenant sales shrank 4% YoY to ~SGD86 psf/mth (MBKE estimates). This marked the first decline for shopper traffic since 1Q12 and tenant sales since GFC.

AEIs to provide downside buffer

Apart from the ongoing AEIs at Bugis Junction and Tampines Mall, CMT will embark on phase 2 AEI at IMM to increase the number of stores and sharpen its value-focussed positioning. It will also reconfigure Basement 1 and Level 2 of JCube (due to complete in 2H14) to add more food kiosks and 50 retails units. This move is timely, given that Westgate opened only last December and tenant relocation may be inevitable. CMT has achieved around +6% rental reversions since 2010 and we expect the trend to last another 1-2 years. We think acquisitions (eg, ION Orchard and Star Vista) offer a better chance of “moving the needle”. Maintain HOLD and DDM-derived target price of SGD2.05.

Worth a revisit

• Trading at undemanding valuation
  
• Further upside from AEI
  
• Debt profile enhanced
  

Valuation increasingly compelling

CapitaMall Trust (CMT) has continued to underperform both its local retail REIT peers and the broader S-REITs sector YTD, and is currently hovering near its 52-week low of S$1.80. This is despite its enhanced portfolio assets, financial position and strong track record. At current price, we believe that valuation is increasingly compelling, now that CMT is trading at 1.04x P/B, and offers a FY14F yield of 6.1%.

Outlook positive; possibly another year of AEI

In the past year, CMT has benefitted from higher secured rentals at several of its portfolio properties post asset enhancement initiatives (AEIs). We believe CMT will continue to focus largely on organic growth via AEI and tenant repositioning. To-date, CMT has announced the AEI on Tampines Mall and Phase 2 of Bugis Junction (both starting in 1Q14), and is currently exploring Phase 2 repositioning of IMM Building, which we believe will continue to improve its portfolio yield. The domestic landscape has also been supportive of the retail leasing demand, given the relatively resilient retail sales, expanding population and interest from international and new-to-market retailers. According to CBRE, Orchard Road rents recorded the strongest rise of 3.4% QoQ to reach S$33.30 psf pm, while the prime suburban rents grew at 1.7% QoQ to S$30.30 in 4Q13. As outlook is still expected to remain sanguine, we thus believe CMT will continue to achieve positive rental reversions upon lease renewals.

Refinancing requirements likely addressed

We also note that CMT has been very active on its capital management lately. Specifically, CMT issued a JPY5b medium-term note (swapped into S$62m at 3.148% interest rate) on 3 Feb and is currently offering a 3.08% retail bond to raise up to a maximum of S$350m. This will address not only the refinancing of its S$350m

convertible bonds due Apr and S$150m medium-term note due Sep, but also extend its debt maturity to 2021. The progressive payments from the sale of Westgate Tower, on the other hand, will likely provide with additional resources for its growth plans. We maintain BUY and S$2.20 fair value on CMT.

Possibly another year of AEI

• 4Q13 DPU up 15.3% YoY
• Positive tenant sales and traffic
• Robust performance expected

Ending FY13 on positive note

CapitaMall Trust (CMT) yesterday reported 4Q13 NPI of S$125.5m and distributable income of S$94.4m, up 11.1% and 18.3% YoY respectively. The strong performance was bolstered by The Atrium@Orchard and IMM Building post asset enhancement initiatives (AEIs) and higher secured rentals on lease renewals. DPU came in at 2.72 S cents, representing an increase of 15.3% YoY. For FY13, DPU amounted to 10.27 S cents, up 8.6%.This is in line with both ours and consensus full-year DPU forecast of 10.1 S cents.

Positive operational performance

As at 31 Dec 2013, portfolio occupancy remained relatively stable at 98.5% as compared to 99.5% seen a quarter ago. The slight decline, we note, was mainly due to the inclusion of Westgate mall, which opened on 2 Dec 2013 with a committed occupancy of 85.8%. For the year, operational performance was largely positive, as evidenced by the positive rental reversion of 6.3% achieved for the 629 new leases/renewals. Moreover, tenant sales psf also increased by 2.5%, while shopper traffic grew 3.1%.

Maintain BUY

Going forward, we believe shopper traffic may improve further at several of CMT’s malls (especially those after completion of development/AEIs), which should sustain the leasing demand currently seen in its portfolio. Management shared that it is seeing a trend of retailers taking up smaller space and that it has tailoring the mall space to make it accessible for them. We think this is positive for CMT as it may command higher rental rates on a psf basis. We also understand that CMT will be embarking on AEI for Tampines Mall and Phase 2 of Bugis Junction to optimise its floor area and yield in 1Q14. On 3 Jan, CMT has granted options to a consortium to purchase Westgate Tower for S$579.4m (up to 24 Jan to exercise options). If the sale materializes, the progressive payments made for the office building will provide CMT with additional resources for its growth plans. We maintain BUY on CMT but revise our fair value from S$2.35 to S$2.20 to reflect higher cost of equity assumptions.

Fairly valued; uninspiring catalyst

• FY13 results in line with our and market expectations.
  
• No material impact from Westgate Tower sale with only marginal 1 SGD cts/share accretion. Capital distribution unlikely.
  
• Maintain HOLD on valuation grounds and uninspiring DPU growth prospects as most of the eligible malls in its portfolio have already undergone asset enhancements.
  

Results in line with expectations

CMT’s FY13 revenue grew 10.2% YoY to SGD729m, attributable to the reopening and completion of AEIs at JCube, Bugis+ and Atrium, as well as the opening of Westgate on 2 Dec 2013. Full-year DPU, which grew 8.6% to 10.27 SGD cts, was within our expectations. CMT saw a 6.3% increase in positive rental reversion in FY13, renewing 629 leases. About 696 leases, constituting 21% of gross rental, will expire in FY14. Portfolio occupancy rate remained strong at 98.5% (FY12: 98.2%). Aggregate leverage was 35.3%, up slightly from 34.8% in the previous quarter due to new borrowings.

Capital distribution unlikely for Westgate Tower sale

At the results briefing today, CMT said that should Sun Venture and Low Keng Huat exercise the option to buy its 30% stake in Westgate Tower for SGD579.4m (option deadline: 24 January), it intends to retain the divestment proceeds for future capex and working capital use and not distribute the gains to unitholders. Based on the purchase consideration of SGD1,900 psf, we value CMT’s stake at ~SGD1,400 psf, which works out to a marginal 1 SGD cts/share accretion. Maintain HOLD on valuation grounds and uninspiring DPU growth prospects as most of the eligible malls in its portfolio have already undergone asset enhancements. We forecast 2.5% DPU CAGR over FY13-16E. Yield-accretive acquisitions, if any, would be a positive catalyst for the stock. Until then, we keep our DDM-derived TP unchanged at SGD2.05 (7% discount rate).

Another quarter of value creation

• 3Q13 DPU up 5.8% YoY
  
• AEI works on track for completion
  
• Strong retail leasing demand
  

3Q13 performance within view

CapitaMall Trust (CMT) turned in a firm set of 3Q13 results last evening. NPI grew by 12.9% YoY to S$126.5m, driven chiefly by The Atrium@Orchard following the completion of asset enhancement initiatives (AEI) in Oct 2012. All other malls, we note, also contributed positively during the quarter due to higher secured rentals, except for Bugis Junction which recorded lower contribution as a result of ongoing refurbishment works since Apr. While CMT had to pay a 9.31% premium on its outstanding convertible bonds due in Jul, it benefited from lower finance expenses and released S$8.5m taxable income retained in 1H13. This boosted the distributable income up by 9.7% to S$88.8m, and DPU up by 5.8% to 2.56 S cents. Hence, 9M13 DPU tallied 7.55 S cents, representing a robust growth of 6.3%. This is in line with our expectations, given that the DPU has met 75.1% of FY13 distribution forecast (consensus: 73.3%).

Steady operational metrics

Management noted that its tenants’ sales increased by 2.8% for 9M13, while its shopper traffic grew by 4.0%. Positive rental reversion of 6.3% was also achieved for the 528 leases renewed over the period, roughly consistent with growth of 6.4% attained in 1H. As at 30 Sep, portfolio occupancy stood at 99.5%, slightly higher than 99.1% level seen in 2Q. CMT updated that it has received strong leasing at Bugis Junction, and over 95% of new retail space has been precommitted for Phase 1 AEI. With the refurbishment works on track for completion in 4Q (Phase 2 to commence in 1Q14), we expect CMT’s portfolio performance to remain sturdy.

New AEI at Tampines Mall

CMT also announced a new AEI at Tampines Mall in 3Q, gelling well with the lease expiry at the mall (23.3% by mall income). Enhancement works are expected to start in 1Q14, and involve increasing its NLA, reconfiguring its retail units and rejuvenating its facade. CMT guided a capex of S$36.0m and an ROI of 8.0% on the project. As CMT looks set to meet our forecasts, we keep our projections intact. Maintain BUY and S$2.35 fair value on CMT.