Journey to the West

• 2Q13 results in line
  
• AEI works at Bugis Junction to complete by 4Q13
  
• Management in the midst of repositioning Jurong malls
  
• Maintain HOLD, TP S$2.20
  

Stable performance. CMT recorded 2Q13 revenue of S$183m (+10% y-o-y), NPI of S$126m (+12%) and distributable income of S$88m (+10%), translating to 2Q13 DPU of 2.53Scts, and 4.99Scts for 1H13. This increase was attributable to contribution from the completion of its AEI activities at JCube, Bugis+ and The Atrium@Orchard, offsetting weaker rental income from IMM and Plaza Singapura due to ongoing AEIs and the loss of an anchor tenant respectively. Portfolio reversions remained stable at c6.4%, in line with trends for the past 3 years. Occupancy edged up to 99.1%. CMT also reported a slight uptick in valuations for its properties, owing to a c15bp compression in cap rates for certain retail malls.

Further works to enhance portfolio. Bugis Junction has begun AEI works after anchor tenant BHG returned c.70k of NLA. The Manager intends to reposition and replace the space with specialty shops which are expected to yield higher rental income. Phase 1, which comprises c.50-60% of the AEI space, will be completed in 4Q13, and management is planning to launch Phase 2 after Chinese New Year and complete by 3Q14.

Repositioning its malls in Jurong Gateway region. Management has taken steps to minimise potential sales cannibalization effect of JEM (which opened in June) on JCube and IMM. Going forward, management has plans to differentiate JCube as a sports and entertainment centre and IMM as a outlet mall. The latter successfully completed its repositioning as an outlet mall in June, and to date there are 51 outlet shops within the mall. Westgate, which is due to open by year end, will add c.402k sqft of retail space to the Jurong area, bringing total new supply in the area to nearly 1msf. Whilst we are optimistic that the malls will benefit from the Jurong Gateway clustering effect, we are wary of the supply overhang in the short term, which could dilute tenant sales and footfalls. However, this should stabilise with population growth within the vicinity and the completion of new offices in the coming quarters.

Maintain HOLD, TP S$2.20. We have adjusted our TP down as a result of increasing the risk free rate assumption to 2.65% from 1.8%, and increasing long term cost of debt from 3.2% to 3.5%, as per guidance from management. Given limited upside, our HOLD call is maintained. CMT offers forward yields of c5.0-5.6%.

Enjoying the fruits of its labour

• 1Q13 DPU of 2.46 Scts was 7% higher y-o-y
  
• Steady organic growth profile; strategic enhancement programs to create value
  
• HOLD, S$2.36 TP
  

Highlights

Good start to 1Q13. CapitaMall Trust (CMT)’s 1Q13 topline and net property income grew 15% and 16% y-o-y to S$178.2m and S$125.1m respectively. This was largely attributable to income contribution upon the completion of its various asset refurbishment exercises at J-cube, Atrium and Bugis over the past few quarters. Organic growth remained firm, with rental revenues from its other malls increasing by c1.4% or SS$2.3m y-o-y. Rental reversion for the quarter was 6.2%, with a high retention rate of 91.3%. Property expenses grew 13% to $53.1m due to higher operating expenses as the malls re-open but margins rise slightly to 70.2%. As such, distribution income of S$93.7m was higher by 14.3% y-o-y. CMT will distribute cS$85.3m (DPU of 2.46 Scts, +7.0% y-o-y) and will retain S$6.6m for working capital and capex requirements.

Our View

Steady organic growth profile; rental reversion stable. Leasing progress at Plaza Singapura is healthy with the space vacated at Carrefour being replaced with new tenants (Cold Storage, John Little and George). IMM mall, which remains on track to reopen as a new concept “Value-focused” mall in May’13, is gaining traction and has secured 50 outlet brands. Looking ahead, the trust will be renewing close to c20.8% of its income and we expect renewal activities to remain fairly steady.

Asset enhancement to Bugis Junction to reap an IRR of 9%. Bugis Junction is proposing an enhancement exercise at Bugis Junction which will involve recovering close to 70,000sqft of space from its anchor department store, BHG and to convert them into specialty stores. Estimated to cost S$35m, while small, is forecasted to add an incremental net property income of S$3m upon completion, translating to a return of c9.0%.

Recommendation

HOLD maintained, TP raised to S$2.36. We have tweaked our estimates to account for additional capex and our reversionary estimates for its various malls. We have forecasted S$400m of acquisitions in our FY14F estimates. TP is thus raised to S$2.36 but given limited upside to our price objective, HOLD call is maintained.

At All The Right Places

Expect more positive news flows. CapitaMall Trust (CMT) has used the bulk of the SGD250m raised via a private placement last November to partially finance the redemption of the SGD300m 2-year retail bonds which matured in February. Nonetheless, we still expect more positive news flows in the following months on new AEI plans, which are most likely to involve Tampines Mall and/or Funan. CMT remains one of our top picks amongst the S-REITs. Reiterate BUY, target price SGD2.36.

Well-managed capital structure. CMT has been diligently trying to smoothen and extend its debt maturity profile following the Global Financial Crisis. Via its MTN programmes, CMT had raised long-term debt of as long as 12 years tenure. After the redemption of the 2-year retail bonds, we estimate the average term to maturity of CMT’s outstanding debt at ~4.2 years, which is one of the longest within the SREIT universe. Its healthy cash position of ~SGD800m will be more than enough to fund future AEIs.

The incumbent’s advantage. The importance of Jurong Lake District as a regional commercial hub has been re-emphasized in the recent Population White Paper and Land Use Plan and CMT remains wellpositioned to capitalize on the area’s accelerated development via its three malls – Jcube, IMM and Westgate. In the longer term, the three strategically-located malls will further benefit from a larger catchment area with the development of Tengah New Town, facilitated by greater connectivity from the future Jurong Region MRT Line.

Hunt as a pack. Under the Government Land Sales Programme, sites slated for pure retail use are few and far between. However, we see more opportunities for integrated developments, particularly those near or integrated with MRT stations. We believe this is where the “Westgate model” can be replicated, i.e. CMT joining up with CapitaLand and CapitaMalls Asia, where CMT will take an initial minority stake during the development phase.

Reiterate BUY. We expect AEI plans pertaining to Tampines Mall and/or Funan to be announced soon, while ION Orchard remains a medium-term acquisition possibility following its recent round of rental reversions. Maintain BUY with a DDM-derived target price of SGD2.36.

Stable quarter but high valuation

FY12 DPU in line with expectations. CapitaMall Trust (CMT) reported FY12 DPU of 9.46S¢ (+1.0% YoY), inline with our FY12 DPU estimate with a deviation of +0.2%. Revenue for this period grew to S$661.6m (+4.9% YoY) while net property income rose to S$445.3m (+6.5% YoY) mainly due to an increase in contribution from JCube, Bugis+ and positive rental reversion from both new and renewal of leases. Going forward, we expect CMT to continue to register strong numbers on the back of 1) contributions from JCube, Bugis+ and Orchard Atrium which were opened in April, August and October 2012 respectively; 2) additional income contribution from Westgate which is expected to be completed in December 2013 and 3) the repositioning of IMM as a value-focused mall with about 30 outlet brands. Although we like CMT for its bright prospect, defensive play (76% CMT’s revenue contributed from suburban malls) and a better than expected pre-commitment rate in its Westgate property (c.50%), given its current valuation, trading at a P/B of 1.3x and a dividend yield of 4.3% we believe this counter is fairly valued as we downgraded our call on CMT to NEUTRAL with an unchanged DDM based (COE: 7.2%, terminal growth: 2.0%) TP of S$2.27.

New contribution from Bugis+, JCube and Orchard Atrium. At the end of December, approximately 99.5%, 99.6% and 95.3% of NLA for JCube, Bugis+ and Orchard Atrium respectively have been committed. Due to the excellent locations coupled with diversified tenants, Since the re-opening of Orhard Atrium in 4Q12, this mall recorded on average of 1.2m footfall on a monthly basis. As Orchard Atrium continues to gain popularity coupled with higher occupancy in the coming months, we expect CMT to continue to benefit from this AEI going forward.

Westgate on-track for completion in 4Q13. Westgate a JV project being the first greenfield development project of CMT is currently on-track for completion in 4Q13.As revealed previously (November 2012), about half the retail space has been pre-leased at an average rent of S$16-18 psf/month. Concurrently, IMM is undergoing an AEI to reposition it as a value-focused mall. The entire exercise will be completed by May 2013 with a total of 50 outlet brands being repositioned.

Counter fairly priced. Although the outlook of CMT continues to remain strong going forward, we believe most of the positive news have been factored into the share price, giving this counter limited room for upside in the near term. In addition, with the counter trading at 1.3x P/B, coupled with a FY13 forecasted dividend yield of 4.3% , we have downgraded our call on CMT to Neutral with an unchanged DDM based TP of S$2.27.

AEI came into fruition

• In line with expectations
  
• FY13 earnings to be driven by full contributions from JCube, Bugis+ and The Atrium
  
• Low gearing and strong balance can be utilised to drive inorganic growth
  
• Maintain HOLD at TP S$2.15
  

Highlights

In line results. CMT reported 4Q revenue and net property income (NPI) of S$173.67m and S$112.9m, +10% y-o-y and +14% y-o-y respectively. The top-line benefitted from the opening of JCube and Bugis+. On a q-o-q basis revenue grew by 1-3% supported by healthy rental reversions of 5.4% to 10.9% p.a for most of its operating malls. The occupancy rate also rose to 98.2% from 94.8% a year ago upon the progressive completion of the asset enhancement initiatives (AEI) work at various malls. 4Q DPU came in at 2.36 cts after retaining CRCT’s S$4m distribution. The management guided that it will retain CRCT’s FY12 (S$15.3m) and future tax-exempted distribution to part fund its capex purpose for various malls which could amount to S$2m per mall per year.

Our View

AEI to drive FY13 earnings. Going forward, the trust should continue to see positive rental reversion of c.6.0% or 2-3% p.a backed by healthy population growth and low unemployment rate. Occupancy for its existing malls should trend up further when the 81,000 sf of space vacated by Carrefour at Plaza Singapura is filled in 1H2013. We expect The Atrium @ Orchard with 87% occupancy to move up progressively as traffic footfall for the enlarged Plaza Singapura gain momentum. The mall attracted a footfall of 1.2m visitors per month post AEI works. The improved portfolio occupancy coupled with the higher contributions from JCube and Bugis will continue to underpin FY13 earnings growth. Meanwhile, the completion of the retail portion of Westgate (currently 50% pre-committed) at the end of 2013 will help to drive earnings in the medium term Healthy financial metrics . The trust refinanced S$783 m loan in Oct’12 and has unencumbered an additional seven properties to 13 out of the 15 properties. In addition, the trust has also secured financing for its 2013 debt with longer term loan with an average debt maturity of 8.8 years. Gearing has moved down to 36.7% post recent placement and revaluation gain of S$69m placing them well to capture acquisition opportunities

Recommendation

Maintain HOLD at S$2.15. We continue to like CMT for its large cap and its conservative balance sheet which we believe can be utilized to drive inorganic growth. Opportunities could come from a visible sponsor pipeline or even through greenfield developments. We have previously factored in $400m worth of acquisitions in our numbers by end of 2013. Trading at 1.3x P/BV, offering a FY13/14 yields at 4.7%-5.0%, we think much of the positives have already been priced in. Upside surprise hinges on CMT delivering higher than expected returns from its completing AEIs or acquisitions.