CapitaMall Trust - The Behemoth In Retail

Retail sales have rebounded. 1Q09 performance was disappointing as consumers shied away from shopping malls during the Chinese New Year season. However, shopper traffic and retail sales bottomed out in Feb 09 and picked up in Apr-May 09. Negative growth for retail sales has narrowed. Basic and necessity goods have fared much better than luxury items.

Quality malls attract long-term tenants. Occupancy reached 99.5% in 1Q09, which is impressive as there is little impact from the recession. CMT benefitted from a flight to quality to well-located malls. Core tenants, eg BHG, Cold Storage and NTUC Fairprice, are players with long-term plans for the Singapore market. Renewal and new leases for 169,233sf of space signed in 1Q09 boasted rental rates that were 1.3% higher than preceding rates.

Occupancy remains in the high-90%. We visited Tampines Mall, Plaza Singapura, Bugis Junction, Raffles City, IMM Building and Sembawang Shopping Centre over the weekend. Shopper traffic was heavy. There were no visible vacant shops at the malls, thus giving us confidence that CMT has maintained occupancy in the high-90% going into 2Q09. We are impressed by CMT's efforts in organising promotional, cultural and educational activities to attract shoppers.

We raise our 2010 and 2011 DPU forecasts by 6.1% and 13.0% to 8.7 and 7.8 cents respectively after factoring in contributions from Jurong Entertainment Complex, which will be completed in 2H11. We also expect occupancy to taper off to 94% (previous: 88%) and retail rentals to correct 12% (previous: 15%). Upgrade to BUY with a target price of S$1.70, based on a dividend discount model (required rate of return: 7.2%, growth: 3.0%).

However, there is another report saying... In the midst of tapering islandwide retail occupancy, we visited three of CMT's competitor malls and conclude that CMT's portfolio should be resilient despite the competition. We are now more positive that rental levels at its suburban malls can be supported. We change our rent assumptions for most of CMT's malls to moderate growth of 3-5% for 2010-11, from declines of 5-10%, and have adjusted for the number of REIT units post-rights. Our 2009 DPU estimate drops by 8% while our 2010-11 estimates rise by 12-25%. Our new DDM-derived target price is S$1.26, up from S$0.87. Compared with its peers, CMT is expensive at 0.86x P/BV and 6% yields vs. the sector average of 10.2%. Maintain Underperform.

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