CapitaMalls Asia (CMA) underperformed yesterday, compared to the STI index. The counter lost 1.5% when the broader index declined 0.4%. After hosting the senior management of the company on a four day non-deal road show in Europe, Macquarie Equities Research (MER) released a research report on 18 March. Macquarie Research maintains an Outperform rating on CMA with a 12-month price target of $2.43, which is a 20.3% increase from yesterday’s closing price of $2.02.

CMA is seeing the benefits of scale, with an extensive retail network to drive core earnings growth. The group will try to have an 80/20 asset split between completed and properties under construction to help drive sustainable return on equity. Asset recycling will happen only if it makes financial sense.

Impact
Road map for core earnings growth. CMA expects core earnings growth of between 30-40% based on announced projects this year. This is from full year contribution of The Star Vista and Bedok Residences in Singapore, contribution from 7 new China malls that were opened in 2012. For FY14, additional contribution will come from Bedok Mall and WestGate Retail, expected to open in 4Q13. For FY15, CMA expects to see higher net property income (NPI) from leases to be renewed from the 2011 malls opened in China.

Asset recycling re-think. The group believes third party acquisitions by its listed REITs will better help expand its extensive leasing network as well as fee income. Any asset recycling to its listed REITs will only be considered if it makes financial sense.

Conservative cap rates. CMA thinks the cap rates used for China of 6.75% to 7.50% is conservative relative to peers. Book value growth since 2009 was driven mainly by higher NPI and not on cap rate compression.

Dividend policy. CMA expects to see 7-8% growth in DPS over the next few years. Its dividend policy is at least 20-25% of reported net profit.

MER’s action and recommendation
CMA is a great play on Asian retail and consumption. With 60% of assets in emerging markets, it could also attract Global Emerging Market funds. Its extensive retail network provide good clarity on occupancy cost trends across various sector trades, which enables the group to renew leases at higher rents, as long as tenant sales are rising. CMA manages 13,000 leases across 81 operating malls (102 malls in portfolio) which also help to bring new retailers into Asia.

Source: Macquarie Research - 05 Apr 2013