CAPITAMALL TRUST - Highe r than expected debt cost (DMG)

NEUTRAL

Price S$1.93

Previous S$2.02

Target S$1.94

2Q11 DP U below expectation by ~6%. CapitaMall Trust (CMT) reported 2Q11 DPU of 2.36S¢ (+3.1% QoQ; +3.1% YoY), equivalent to 23% of our FY11 DPU estimate. Main reason for below expectation DPU was attributable to higher than expected interest expense and debt-related transaction cost which amounted to S$34.6m in 2Q11 (+6.6% QoQ, +5.4% YoY) vs our FY11 interest expense estimate of S$95m. On the other hand, net property income rose 7.7% YoY to S$106m (+0.7% QoQ) mainly due to new contributions from Clarke Quay (acquired in Jul 2010) and Illuma (acquired in Apr 2011), and higher rental rates achieved from new and renewed leases. Following our interest expense revision upwards by ~21%, our FY11-12 DPU are reduced by 7.6-4.7% respectively. Consequently, our TP is lowered to S$1.94, derived based on DDM (COE: 8.0%, terminal growth: 2.0%). Maintain NEUTRAL.

Positive rental reversion continues. CMT continues to enjoy positive rental reversion at 7.8% in 2Q11 (vs 7.5% in 1Q11). Given that ~8.2% of portfolio NLA will be up for renewal in 2H11 (~402k sqft), we believe CMT will be able to reap further benefit from positive rental reversion. However, due to abundant supply coming on stream outside central region estimated at ~3.6m sqft during 2H11-2015, we expect the rate of growth of spot rents to decline gradually for certain suburban areas. Nonetheless, we expect CMT to benefit from further positive rental reversion on the back of expiring leases in FY12-13 at 33.1-32.8% of total gross rental income for Mar 2011 respectively.

Leasing commitment hit ~80% for JCube; more AEI in the pipeline. Asset enhancement work for JCube is scheduled to be completed by 1Q12. With ~nine months to go, we view the pre-commitment lease of 80% as encouraging. Our current forecast has factored in contribution of JCube in FY12. Once operational, JCube will add another 204k sqft of NLA to CMT’s portfolio (~4.0% of current portfolio). Separately, CMT intends to undertake asset enhancement works on Illuma which will cost ~S$30m. More details on the Illuma AEI work will be revealed later on.

Positive rental reversion continues. For 2Q11, CMT continue to register strong positive rental reversion across its portfolio malls. In particular, Clarke Quay and Lot One Shoppers’ Mall (Choa Chu Kang) showed the strongest rental reversion with its renewal rates 9.3-9.8% higher than preceding rental rates (committed ~three years ago). On the whole, CMT’s portfolio malls achieved average renewal rates which are 7.8% higher than preceding rental rates, implying a 2.5%/year growth in average renewal rates. In 1Q11 and 2Q10, the renewal rates rose 7.5% and 6.3% over preceding rental rates respectively.

Estimated 3.6m sqft retail space to be added 2H11-2015 will keep the spot rent growth in check. Whilst we expect spot rents of retail space to continue to rise, the upcoming supply of retail space in the next five years is expected to keep spot rent in check. Based on a historical incremental demand of ~526k sqft/year, the new supply between 2H11-2015 can only be digested in ~6-7 years. However, we believe that selective regions, especially in the suburban areas where there are few prime malls, will still be able to see strong positive rental reversions.

JCube expected to start contribution in 2Q12. Redevelopment of JCube is on-track with 80% of its space already pre-leased. We expect JCube to be operational beginning 2Q12 with FY12 DPU contribution of ~0.5-0.7S¢. Separately, CMT intends to undertake more AEI works on Iluma. Preliminary total capex for Illuma AEI is estimated at ~S$30m. More details will be revealed later on.

VALUATION

We value CMT at TP of S$1.94 based on DDM (COE: 8.0%; TGR: 2.0%). Currently, we think CMT is trading fairly with a spread of 3.0%, which is at par with its mean spread of 3.0%. Although we expect CMT to continue to experience positive rental reversion, we do not think the growth from higher passing rent is sufficient to compensate for current rich valuation. Maintain NEUTRAL.