Fair value for a safety net

• Results in line; 6M DPU is 48% of our FY12 forecast.

• Steady rental reversion despite slower traffic footfall, AEI including IMM building to drive earnings

• Downgrade to HOLD on valuation grounds, TP maintained at S$2.05

In line with expectations. Gross revenues and NPI for 2Q12 had grown by 3%-7% on a q-o-q and y-o-y basis. The increase was largely led by JCube, which reopened in April, as well as higher rental reversions across all malls except for The Atrium and Bugis+, which are currently undergoing asset enhancement initiatives (AEI) work. As a result, DPU was marginally higher than a year ago at 2.38cts, bringing 1H DPU to 4.68 cents or 48% of our FY2012 forecast. The trust took in a revaluation surplus of S$96.9m to lift book NAV by 5.1% to S$1.62.

Portfolio performance still healthy. Occupancy has improved from 94.8% to 98.6% as the Atrium and Bugis+ emerge from the most intense phase of refurbishment. Management has also guided that positive rental reversion for the 2H should hold steady at c.6.0% vs 6.4% in the 1H. That said, in line with the general market, the economic slowdown has somewhat affected consumer spending, resulting in slower shopper traffic (-3.0% y-o-y) and tenant sales (+1.5% y-o-y). Meanwhile, the trust has announced that it would be repositioning IMM to become the largest outlet mall in Singapore. Enhancement work had begun in May and will be completed in a year. The mall will see a doubling of its outlet stores to 40-50 brands upon completion. While this could potentially lower the average rent, we think it would drive footfall in the longer term in view of the new competition.

Downgrade to HOLD on valuation grounds. While we like CMT for its big cap status and its defensive earnings, the stock is trading close to our target price, thus we downgrade our call to HOLD. We have also nudged FY12/13 DPU down slightly by 1-3% to account for IMM AEI work. Upside risks to our call will hinge on better-than expected execution of its enhancement initiatives and the current environment with investor demand for yield, resulting in further yield compression.

Change in CEO but no change in strategy

Changes at the top. CapitaMall Trust (CMT) announced that Mr Ho Chee Hwee Simon has resigned as Chief Executive Officer (CEO) of the company and will be succeeded by Mr Tan Wee Yan, Wilson, who is currently the Deputy CEO of CMT with effect from 1 July 2012. Wilson Tan joined CMT from CMA where he was SVP in the CEO’s office for the Singapore market in Feb this year and prior to this he was the Group CEO of Singapore Post Limited.

Not unexpected, strategy intact. We believe that these changes are somewhat expected and we do not expect any major change in strategy, business model and operations at CMT. Meanwhile, Mr Simon Ho has assumed a new role as the Deputy CEO of CapitaMall Asia (CMA) and will remain a director and a member of the Investment Committee of CMT. Hence, we think the long-term strategies remain intact with stronger synergies in place.

Maintain BUY. We believe the changes should not have any impact on stock prices and we continue to like CMT for its strong execution ability. While the reit has delivered relatively modest growth in its results in the last few quarters, we believe that should change. We see a stronger performance in 2H, supported by the full contribution of JCube as well as the gradual completion of the AEI works at Clarke Quay, Bugis+ and The Atrium by 2012-2013. In the longer term, the completion of the retail portion of Westgate in 2013 should underpin medium term earnings growth. Maintain BUY at an unchanged TP of S$2.05.

EXECUTION REMAINS SPOT ON

•Refinancing going smoothly

•Hougang Plaza sale to strengthen balance sheet

•Bugis+ enhancement completing Jul 12

Refinancing – so far so good

CapitaMall Trust (CMT) recently announced that it would issue HKD1.15b 3.76% Fixed Rate Notes due 2022 under its USD2.0b Euro-Medium Term Note Program. The proceeds would be swapped into SGD190.1m at a fixed 3.45% rate and used to partially refinance the S$783m secured term loan maturing in Oct 2012. We note that CMT’s refinancing is going smoothly with interest costs mostly in line with its current average of 3.3% (end 1Q12), which would consolidate its balance sheet position and lengthen the average term to maturity of its debt structure.

Hougang Plaza divestment further consolidates balance sheet

CMT also recently completed the sale of Hougang Plaza for S$119.1m, resulting in a divestment gain of S$83.8m. Proceeds would likely be used to repay debt and fund potential acquisitions. In our view, with S$1.2b of cash already on its balance sheet and its share price trading at a relatively tight yield of 5.6%, we think CMT’s deployment of the sales proceeds could potentially shed further light on the odds of making a bid for its parent’s stake in the ION ahead.

Bugis+ on track to complete enhancement works

Bugis+ remains on track to complete AEI works by Jul 2012 and its major anchor tenant, Uniqlo, recently began operations. We believe that over 90% of tenants, including Sephora and Aeropostale, would begin sales over the next few months. The yield on cost (including AEI) for Bugis+ is estimated at ~5.8%, in line with that of Bugis Junction, and is significantly improved from the 3.8% passing yield seen when Bugis+ was first acquired as Illuma.

Maintain BUY at fair value estimate of S$2.02

We continue to like CMT’s significant exposure to sub-urban retail rentals, which was relatively resilient during the last downturn. Note that, despite seeing gross turnover fall as much as 21% in some trade categories over FY09, rental reversions remained positive at 2.3% across the portfolio with occupancy rates close to 100%. Maintain BUY with a fair value estimate of S$2.02.

More Plus Points

Bugis+ opens its doors. We visited Bugis+ a week after its major anchor tenant UNIQLO launched its duplex flagship store, which is UNIQLO’s first street-level store in Singapore. We were encouraged by the footfall even though AEI works are not fully complete and we believe that CapitaMall Trust (CMT) will be able to bring Bugis+ up to its desired level of operation as projected. Maintain BUY.

Synergies evident between Bugis Junction and Bugis+. With UNIQLO’s 20,000-sq-ft shop as the main anchor, Bugis+ will be an extension of Bugis Junction, drawing the young and trendy that makes up its targeted captive market. By July, the bulk of the AEI works should be complete, and other offerings like the cineplex will help to attract even more shoppers when they open. Management estimates the yieldon-cost post AEI will be 5.8%, taking it much closer to Bugis Junction and vindicating its acquisition.

Portfolio still substantially catered to necessity shopping. Even though Bugis+ is geared towards lifestyle discretionary spending, CMT’s portfolio of malls remains predominantly catered to necessity shopping, accounting for approximately 73.1% of gross revenue as at end-2011. Apart from the normal rental reversion, DPU growth will also be supported by the incremental contributions from the AEIs at Clarke Quay and Atrium@Orchard when they are completed.

Hougang Plaza divestment completed. The sale of Hougang Plaza to a JV comprising Oxley Holdings and Lian Beng Group for a consideration of SGD119.1m has been completed. The divestment of this non-core asset will net CMT a handsome gain of SGD83.8m, as the new buyers look to redevelop the property. The sale is a positive indicator that the REIT is open to divesting some of its non-core assets if the right offers come along.

A ‘must-own’ stock. Notwithstanding global economic growth concerns, we believe that CMT can extend its steady growth in DPU, making it a “must-own” investment in our view. Maintain BUY, with our DDM-derived target price unchanged at SGD2.20.