CapitaMall Trust - Retail resiliency

We increase our distributable income forecasts to S$273m in FY09 (+26%) and to S$291m in FY10 (+45%) to reflect: 1) higher occupancy rates of 99% (from 95%) in FY09; 2) a rise in our FY09 retail spot rent assumption from a 20% yoy decline to a 10% decline; and 3) lower interest cost assumptions, as debt is paid down by rights proceeds of S$1.2bn in 2H09. FY09 earnings are essentially a known variable, with only 2% of rents up for renewal. But negative rent reversion could kick in next year when 37% of its rents are due for renewal. Despite this, we expect distributable income to improve 6.6% yoy in FY10 due to interest savings.

Retail rents and occupancy were more resilient than we expected despite a supply pipeline of 2.1m sq ft in 2009 and 2.2m in 2010 vs average new demand of 0.24m sq ft pa in the past decade. CMT maintained its portfolio occupancy rate at a high 99.7% in 2Q09, a testament, in our view, to its superior retail property management skills. Prime Orchard spot rents fell 6% hoh to S$33.90 psf in 1H09, but suburban malls declined only 2.4% hoh to S$28.30 in the same period, boding well for CMT as 51% of its portfolio is suburban malls. Our higher spot rent assumptions are also supported by higher shopper traffic (+1.3% yoy) in 2Q09,14% higher than in 2Q07.

Our DCF-based target of S$1.64 (from S$1.60) reflects: 1) a higher share base arising from its rights issue in February and 2) higher valuation of S$5.2bn (+69%) due to our higher FY09-FY11 earning forecasts. Dividend yields are at a decent 5.9% in FY09F and 6.3% in FY10F.

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