CapitaMall Trust - Not quite a safe haven

We maintain our (Underperform) rating for CMT, and believe there is still a high degree of uncertainty over how the trend for retail sales (down 11.7% YoY for April) will play out over the remainder of the year (we are not so sure that the worst is over), or how the rollout of new retail supply would affect the operations or pricing power of existing malls.

We see CMT’s two major earnings-related risks as: 1) falling market rents and the start of a negative rental-reversion phase, and 2) the implementation of concessionary rent cuts to keep retailers afloat under a prolonged retail-sales slump.

Suburban malls make up the core of CMT’s portfolio, but it also owns The Atrium (an office property on Orchard Road acquired at the peak of the market and with considerable asset-value downside, in our view), a 40% stake in Raffles City, and Plaza Singapura. Even though Plaza Singapura is not high-end, we see a considerable amount of new retail space on Orchard Road catering to a similar (youth and lifestyle) market, especially at Orchard Central.

We maintain our six-month target price, based on our RNG-valuation method, of S$1.32, obtained from capitalising the estimated FY09 core operating distribution at an effective cap-rate assumption of 7.0%. CMT’s target price to latest (March 2009) book, adjusted for the rights issue, of S$1.66, is 0.80x.

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