CapitaMall Trust (CMT) - HOLD by OCBC

Flat QoQ revenue growth in 1Q09. For 1Q09, CapitaMall Trust (CMT) reported gross revenue growth of 11.1% YoY or flat QoQ to S$134.5m. Net property income increased by a smaller 9.1% YoY and 7.5% QoQ to S$92.4m due to higher operating expenses from the acquisition of The Atrium and the opening of the Sembawang Shopping Centre. Unrealised forex loss of S$11.4m was recognized on the translation difference of syndicated loan but had no impact on cashflow. Reported balance sheet had not taken into account the Rights issue and the post-Rights issue balance sheet is likely to have a net gearing ratio of 29.2%.

Expecting further downside in retail rents. Conditions in the retail scene deteriorated further in 1Q09. Within CMT's portfolio, only tenants in trade sectors such as supermarket, books & stationery, department stores and beauty and health related sectors experienced increase in consumer spending. Some of the trade sectors that have been perceived defensive and performed well in 4Q08, such as food & beverages sectors experienced turnover decline in 1Q09. With the recent downgrade of Singapore 2009 GDP growth to -6% to -9%, we are seeing increasing risk of further deterioration in consumer spending in the coming quarters. Declining turnover would translate to higher occupancy costs for tenants and this raises more doubt over the sustainability of high rental rates going forward. As such, we are now forecasting rent decline of -10% (from -5%) for CMT's retail portfolio.

Downgrade to HOLD. Our revised DPU estimates have been lowered to 9 S-cents for FY09 (previously 9.1 S-cents) and 9.3 S-cents for FY10 (previously 9.4 S-cents). Risk-reward proposition may not look as attractive as before, with the worsening outlook and the recent increase in share price. Nevertheless, CMT has already locked in 90% of FY08 gross revenue (~S$460m) for FY09 and this will provide strong DPU visibility for FY09. Our fair value estimate has now been lowered to S$1.21 (previously S$1.26). CMT is now trading at our estimated FY09 DPU yield of 7% and for 1Q09, it will be distributing 1.97 S-cents to unitholders (annualized yield: 6.2%). While CMT has retained S$3.3m of taxable income (exclude CRCT distribution) in 1Q09, it is still committed to pay out 100% of its taxable income to unitholders for FY09. For now, we see limited share price upside and with no near term catalyst in sight, we are downgrading CMT to HOLD.