Languishing price performance unjustified
CapitaMall Trust (CMT) has been a clear laggard within the S-REITs space, staying flat YTD versus an average of 11.0% increase in unit prices for its local retail peers (FTSE ST REIT Index: 7.2% YTD). We believe this is unjustified given its portfolio of 15 quality retail malls, which are strategically located in the suburban areas and downtown core of Singapore, and its relentless efforts in optimizing its yield via asset enhancement initiatives (AEIs). We note that 2012 saw the completion of refurbishment works at JCube, Bugis+ and The Atrium@Orchard and subsequently strong take-up rates post AEI. In early Jan, CMT fully concluded the AEI at Clarke Quay and leased out all the space. All these activities are likely to contribute positively to CMT’s rental income and uphold its firm performance going forward, in our view.
Outlook still looks positive
The operating landscape in the retail space also appears sanguine thus far. According to CBRE, the average rents in prime Orchard Road rose for the first time (up 2% QoQ) in 1Q13 after staying flat since 3Q11. While the suburban retail will see a substantial amount of space (~1.6m sqft) coming online in 2013, CBRE notes that retailers are still upbeat about the suburban market (1Q13 rents flat QoQ). This is consistent with our view that both Orchard Road and suburban rents may possibly remain firm in 2013. Should this happen, we project that CMT may again achieve positive reversion rates similar to those seen in
2010-12 (6.0-6.5%), upon renewal of its leases.
Maintain BUY
We also note that CMT has recently established the Distribution Reinvestment Plan and increased its Euro MTN programme limit from US$2b to US$3b. This, together with the retention of CRCT’s distribution, will provide CMT with the funds for its investments/ working capital. We are keeping our S$2.32 fair value unchanged and maintaining BUY on CMT as we expect the valuation gap to narrow between CMT and its peers.
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