CapitaMall Trust - Open to acquisitions if deemed accretive

CMT articulated its criteria for acquisitions as: 1) initial DPU accretion; 2) scope for asset enhancement; and 3) sustainability of market rents. Our checks indicate that Pramerica could sell four malls, which we think provide a strategic fit with CMT’s existing portfolio. The malls could cost around S$1.5bn, and CMT, if it were to buy the assets, may raise equity if it is to maintain its gearing at 30-35%. We have not factored in these potential acquisitions, which we believe will be mildly accretive.

Prime Orchard Road retail rents fell 6% YoY and suburban rents fell 2.4% YoY in H109, less than our forecast of -18% and -8%. Property consultants cite strong demand by new entrants and new concepts as reasons for resilient rents. In the suburbs, rents were supported by limited supply. We revise our 2009 prime rental forecast to -10% YoY and remove our rebate assumption. For the suburbs, we expect rents to stabilise at -2.4% for the full year.

We believe the Q209 result reaffirms CMT’s attributes of having a strong defensive portfolio with stable growth. CMT’s mall occupancy remains at 99.7%. H109 portfolio assets were re-valued down by S$252m to S$6.9bn, largely due to a 10bp expansion in cap rates.

We raise 2009-12 EPU by 3-12% on rental upgrades and AEIs for JEC and Atrium. The rental upgrades account for 18cts, and AEI 8cts change from our previous price target. Our DCF-derived price target uses a 2.6% risk-free rate, 1x beta, and 5% ERP. We raise 2010E EPS from S$0.08 to S$0.09.

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