ENHANCEMENT WORKS COMING ALONG SMOOTHLY

•1Q12 distributable income of S$76.6m

•Expect reversions to ease ahead

•AEIs to drive distribution upside

1Q12 results broadly in line

CapitaMall Trust (CMT) reported 1Q12 distributable income of S$76.6m (DPU: 2.30 S cents) which is 4.6% higher YoY. This is broadly in line with our expectations and make up 23% of our FY12 forecast. Topline came in at S$155.2m, up 0.4% YoY – rental income was boosted by higher rentals and the Illuma acquisition but mostly offset by lower income from the Atrium due to enhancement works.

Rental reversions could ease ahead

1Q performances across CMT’s portfolio stayed firm; occupancy improved to 96% with pressure coming mostly from Atrium’s enhancement works. Average rental reversions over 1Q12 remained positive at 6.1% across the portfolio. However, we forecast reversions to ease into the year, as the economic outlook softens. Operating expenses (Opex) on a comparable mall basis fell 6.7% YoY which surprised us mildly; we understand from management that this was mostly attributed to one-time items and expect opex ratios to track closer to FY11 levels ahead.

Malls returning from AEIs – a key driver for growth

We continue to see CMT execute well on its asset enhancement initiatives (AEI) – a key driver for distribution upside ahead as malls under enhancement return to operations over FY12-13. JCube opened on 2 Apr 12, with 99% of NLA committed at average rentals of S$11-12 psf, and we expect contributions to begin in 2Q12. Management expects a 9.7% ROE on investment upon stabilization. Enhancement works for Illuma (to be renamed as Bugis +) remains on track to complete by Jul 12, and over 90% of the tenants are slated to start operations by Jun 12. We observe a significant revitalization of the retail tenant mix with Uniqlo, Sephora and Aeropostale coming into the mall. The Atrium would complete its enhancement in 4Q12. The take-up rates at Bugis + and Atrium are encouraging with over 80% and 73% of NLA currently taken up.

Maintain BUY with unchanged fair value

We continue to like CMT for its AEI execution and believe that valuations remain attractive at current levels. Maintain BUY with an unchanged S$2.02 fair value estimate.

CapitaMall's Q1 DPU inches up on flat revenue

CAPITAMALL Trust (CMT), which counts Raffles City, Bugis Junction and new mall JCube, among others in its portfolio, saw its distribution per unit (DPU) in the first quarter edge up to 2.30 cents from 2.29 cents the year before.

This works out to an annualised distribution yield of 5.04 per cent, based on CMT's closing price of $1.835 per unit on April 17.

CapitaMall Trust Management (CMTM), CMT's manager, said the books closure date will be on April 26, and unitholders can expect to receive their Q1 2012 DPU on May 30.

CMT's net property income has risen to $108.33 million for the first quarter ended March 31, 2012, up 2.5 per cent from the year-ago period.

Gross revenue inched up 0.8 per cent year-on-year to $155.24 million, helped by higher rental rates achieved from new and renewed leases. CMT said that excluding the Atrium@Orchard, which is undergoing asset enhancement works, its gross revenue would have grown 3.6 per cent year-on-year.

CMT's distributable income to unitholders was $76.61 million, an increase of 4.6 per cent from the same period last year.

Property operating expenses – an area of concern in Q4 last year – fell to $46.9 million in Q1 2012 from $59.1 million in Q4 last year.

The trust said its strong foundation would enable it to ride out potential economic uncertainties, partly because of the large and diversified tenant base of its portfolio, which give stability and sustainability to the malls' occupancy rates and rental revenues.

Said James Koh, chairman of CMTM: "We expect our city malls located in the downtown core of Singapore to continue to do well this year as the Singapore Tourism Board has forecast 13.5 to 14.5 million tourist arrivals for 2012."

In a separate announcement yesterday, CMT said its Bugis+ mall – formerly known as Iluma – is undergoing a $38 million transformation due to be completed in July this year.

CMT said over 80 per cent of Bugis+ has been pre-committed. The revamped mall will boast more than 30 new brands, including Japanese clothing chain Uniqlo and fast-food franchise BonChon Chicken.

CMT shares ended yesterday up half a cent at $1.84.

The suburban revolution

Always forward-looking. CapitaMall Trust (CMT) has a proven track record of delivering consistent growth in distributable income and the next three years could be even more rewarding for investors. This year alone, it will complete its asset enhancement initiatives (AEIs) at four properties. CMT is rated Buy for its active lease management, proactive asset enhancements for organic DPU growth and potential upside of 22%. The company will release its 1Q12 results on Wednesday.

Harvesting rewards. JCube recently reopened, making it the only shopping mall in Singapore with an Olympic-size ice skating rink. For the rest of this year, CMT will conclude its AEIs at Iluma, Clarke Quay and The Atrium@Orchard. Together with the normal rental reversions, we forecast a DPU growth of 15.7% over a two-year period, resulting in a decent DPU yield of about 6% in FY13F.

Retail assets to remain resilient. CMT’s malls have consistently enjoyed healthy occupancy rates in excess of 99%, unless they are undergoing AEIs. With over 70% of its portfolio catering to necessity shopping, CMT’s underlying distributions should remain defensive even if domestic economic growth were to slow to sub-3% pa. As of 2011, the occupancy costs for CMT’s tenants stood at a comfortable 16%, lower than the comparables in Australia and New Zealand.

Acquisitions not on the radar. Last year, CMT acquired Iluma and a 30% stake in the upcoming Westgate. In our view, acquisitions are unlikely this year as the company reels in the rewards from the abovementioned AEIs. Timing aside, we reckon that first on its to-buy list will be CapitaMalls Asia’s 50% stake in the iconic ION Orchard, which we value at $1.45b (or $4,500 psf NLA). At 50% LTV, we estimate that such an acquisition could take CMT’s gearing to about 43% – not ideal, but still fairly comfortable.

More exciting than it looks. While CMT is recognised for its defensive nature, we believe that its DPU growth prospects over the next two years will continue to warrant a Buy call. Our DDM-derived target price of $2.20 suggests an attractive 22% upside potential.

An AEI-ventful year

CMT could start reaping the fruits of its labour this year from a few major AEI completions. These would include the newly-opened JCube and its upcoming Atrium@Orchard and Iluma. Our JCube visit and strong tourist arrivals leave us confident of its performance this year.

We adjust DPUs by -1% to +3% on housekeeping matters but keep our DDM target price (discount rate: 8.6%). Maintain Outperform for its exposure to resilient mall spending, with upside from strong city malls and higher-than-expected ROIs from AEI.

JCube visit fuels positivity

We visited CMT‟s newly-opened JCube and came away positive on management‟s design and leasing capabilities. The mall is fully pre-committed. Though some stores (est. 10-15%) have yet to open, JCube was bustling with families and teenagers on a weekend afternoon. JCube has a good mix of F&B and activity-oriented (sports, hobbies & collectibles, IT, entertainment) tenants with fewer fashion offerings, in a possibly deliberate attempt to limit head-on competition with nearby malls, and Lend Lease‟s upcoming JEM and Capland/CMA/CMT‟s Westgate.

More AEI completions

Having gone through a bout of AEI works in 2011, 2012-13 could be years of reckoning. Apart from JCube, major AEIs slated for completion this year include Iluma and Atrium@Orchard. We are hopeful of upside given these malls‟ exposure to tourism spending in the core central region. We expect this to mitigate opex pressures stemming from higher utility and security expenses. New malls (after AEI) such as JCube also typically come with energy-saving features to lower utility expenses.

Tourism boost for city malls

We expect CMT‟s city malls to benefit from surging tourist arrivals. 2M12 tourist arrivals were up 14% yoy, quashing our previous expectation of 3-5% growth for the year. With Atrium@Orchard being the sole retail addition in the core central region this year, we expect CMT‟s city malls to benefit. Particularly, AEI completion at Atrium@Orchard and Iluma is expected this year, which should position both well in rental negotiations.