Before the trading session started yesterday, CapitaMalls Asia (CMA) reported 1Q13 net profits of S$73.2m, +9.6% YoY. On the same day, Macquarie Equities Research (MER) issued a note maintaining its ‘Outperform’ recommendation and a 12-month price target of S$2.43. Some excerpts from the note are shown below.

Excluding revaluation gains, core net profits were 102.8% higher than S$36.1m in 1Q12. There was a S$6.6m gain from transferring two malls to its development fund III. Core net earnings were S$66.6m, in-line with MER’s estimate of S$67.0m. 

Impact
1Q13 result highlights. In Singapore, small mall net property income (NPI) was +1.3% on the back of circa +4% shopper traffic and tenant sales. China same mall NPI was +15.2% as tenant sales were +15.9% on flat shopper traffic. The China portfolio gross yield on cost was 11.8%, with a net yield of 7.2%. Its 2006 and 2007 vintage net yield on cost is at 10-11%.   

Well-capitalised, with various capital partners. Net gearing was slightly lower, from 30% in Dec 12 to 25%, due to the asset transfer. There is no major refinancing in 2013 with the debt profile comfortably below 10% of group net asset value (NAV) each year. 

Earnings drivers over the next three years remain intact.  CMA expects core earnings growth of between 30-40% in FY13 based on announced projects. This is from the full year contribution of The Star Vista and Bedok Residences in Singapore and 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 rent reversion of leases signed from the 2011 malls opened in China.

MER’s Action and recommendation
CMA has an extensive retail network providing 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 helps to bring new retailers into Asia. MER believes it is a great play on Asian retail and consumption. With 60% of assets in emerging markets, it could also attract interest from GEM funds.

MER believes that the recent share price pull-back of 13.4% off its 52-week high of S$2.26 presents a buying opportunity into a well-managed retail mall owner and operator. There is a potential 23% upside to MER’s target price of S$$2.43 (current price over book value (P/BV) at 1.16x; implied P/BV of 1.43x).

Source: Macquarie Research - 26 Apr 2013