CapitaMall Trust

Kim Eng on 16 Apr 2012

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.