CapitaMall Trust (CMT) - Defensive portfolio

Strong balance sheet: Post the rights issue, we believe investors’ concerns regarding the equity overhang and debt refinancing will be alleviated. CMT's total debt has been reduced to S$2.2bn and gearing to 28% from 42%.

Retail more resilient: We believe retail rents are likely to hold up better relative to other property sub-segments. Retail asset values have not shown the same appreciation as in the office sub-segment and we expect downward revaluation of CMT’s portfolio to be less aggressive.

Defensive portfolio; mostly suburban malls: The majority of CMT’s portfolio is exposed to the suburban mall segment which is not in direct competition with the incoming supply in the central region. Retail rents for the suburban malls have proven to be relatively resilient in past downturns.

DPU and NAV dilution: Given the nine for 10 rights issue, our FY09-11E DPU will be diluted by an average of 37% while NAV is reduced to S$1.68/share (-31%).

Lower-than-expected rental renewals: Weakness in the general economy could lead to lower-than-forecast rentals and occupancy.

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SingTel’s Australia NBN proposal rejected

The Australian government announced this morning that it was not accepting any of the proposals submitted to build their National Broadband Network (NBN), including that of SingTel’s Optus Network Investments. Instead, the government will take A$4.7bn to fund the equity of a company that will begin building the Australian NBN and then later seek to bring the private sector into the project (initially capped at 49%). In total, it expects the project could cost A$43bn over eight years. Moreover, the government announced that it will begin a consultative process to review the regulatory regime.

Although SingTel’s proposal was rejected, we view this outcome as a positive for the company. Most importantly, the government’s initial majority ownership of the network and the intent to review the regulatory regime appear to be positive steps towards meeting SingTel’s main strategic objective in Australia with regards to the NBN, i.e. move the fixed-line industry towards a more level playing field by having an open access and structurally separate NBN. Secondly, the large size of the project would have added a significant financial burden to SingTel had they won.

We view this news as a net positive for SingTel in that it should improve SingTel’s position in the Australian fixed-line sector over the long-term. In the short-term, however, this news has no impact to our earnings or price target. Our 12-month SOTP price target of S$2.43 capitalizes our estimates of the Singapore and Australian normalized EV FCF yield of 7.5%. We also use a mixture of market prices and target prices (where available) of SingTel's associates before applying a 20% holding company discount to these assets. Currency volatility is a key upside and downside risk to SingTel’s valuation, which recently has moved in SingTel’s favor.

DBS - Margin squeeze

Possible slowdown in reforms: DBS’ CEO, Richard Stanley, was unfortunately taken ill in late January 2009, and is expected to be off work for 3-6 months. While this is unlikely to impact the group’s day-to-day operations, we suspect any reform momentum that was building post his appointment in May 2008 may slow.

Margin squeeze: The 3-month SIBOR has fallen by 26bp to 0.69% since end-December 2008. We expect this to put a squeeze on DBS’ NIMs and add additional downward pressure on prospective earnings.

Asset quality proves to be more resilient than expected: We think this is the key risk to our call. However, we think the risk of this materializing is low considering the rapidly deteriorating economic conditions.