CapitaMall Trust

Maybank Kim Eng Research, Nov 27

WE downgrade CapitaMall Trust (CMT) to HOLD on valuation grounds and lacklustre distribution per unit (DPU) growth prospects as most of its eligible portfolio malls have already undergone asset enhancements (little boost to our DDM (dividend discount model)-derived TP).

The remaining known drivers include:

(1) Bugis Junction, which will complete its S$35 million asset enhancement initiative (AEI) with incremental S$3.1 million net property income (NPI) per annum, by Q3-14;

(2) Tampines Mall with its S$36 million AEI (with incremental S$2.9m NPI per annum) by Q4FY15; and,

(3) the active leasing of Westgate and Westgate Tower (30 per cent stake) in Q4FY13 and Q4-14, respectively.

The two AEIs are relatively small with projected increment in capital value (net of capex) of S$22.1 million and S$16.4 million, respectively, adding about three Singapore cents to our revalued net asset value (RNAV).

We are forecasting an unexciting 2.6 per cent DPU compound annual growth rate (CAGR) for 2013-2016.

All eyes are on Westgate. CapitaLand announced in August that it will retain its corporate headquarters at Capital Tower in the CBD, reversing its earlier intention to move to Westgate Tower a year ago.

CapitaLand was originally slated to occupy half of Westgate Tower. This means all 320,000 square feet (sq ft) of net lettable area (NLA) in the tower is now available for lease by end 2014.

All 314,000 sq ft of office space in the Jem development next door, slated to complete later this year, has been fully leased with key tenants being the Ministry of National Development, the Building & Construction Authority and the Agri-Food & Veterinary Authority.

Westgate will face competition in its next rent review cycle in 2016-2017 when Sim Lian's nearby mixed development project in Venture Avenue (with minimum 90 per cent office component or about 500,000 sq ft office space) comes onboard.

We are forecasting average passing rents of S$16.50psf/month for Westgate retail and S$7.50 for Westgate Tower.

Acquisitions are unlikely in the near term.

CMT's gearing is at a comfortable 34.8 per cent. While management is open to acquisitions, we think any acquisition from its sponsor is unlikely to happen soon.

This is because CMA's most stabilised asset, ION Orchard, remains a major contributor to recurrent income while the other properties (The Star Vista, Bedok Mall and 50 per cent stake in Westgate) are either not stabilised or still under construction.

The redevelopment of Funan (additional gross floor area of 315,561 sq ft already approved for office use) remains a possibility, but we believe the preference would be to change it to retail use, either in whole or in part.

There is also market talk of CapitaLand selling strata offices in Westgate Tower on a whole floor basis.

The eventual materialisation of Funan's AEI plans and Westgate Tower strata office sales may be positive catalysts for the stock, but until then, we derate CMT to HOLD with a TP of S$2.10.

HOLD