• Trading at undemanding valuation
• Further upside from AEI
• Debt profile enhanced

Valuation increasingly compelling

CapitaMall Trust (CMT) has continued to underperform both its local retail REIT peers and the broader S-REITs sector YTD, and is currently hovering near its 52-week low of S$1.80. This is despite its enhanced portfolio assets, financial position and strong track record. At current price, we believe that valuation is increasingly compelling, now that CMT is trading at 1.04x P/B, and offers a FY14F yield of 6.1%.

Outlook positive; possibly another year of AEI

In the past year, CMT has benefitted from higher secured rentals at several of its portfolio properties post asset enhancement initiatives (AEIs). We believe CMT will continue to focus largely on organic growth via AEI and tenant repositioning. To-date, CMT has announced the AEI on Tampines Mall and Phase 2 of Bugis Junction (both starting in 1Q14), and is currently exploring Phase 2 repositioning of IMM Building, which we believe will continue to improve its portfolio yield. The domestic landscape has also been supportive of the retail leasing demand, given the relatively resilient retail sales, expanding population and interest from international and new-to-market retailers. According to CBRE, Orchard Road rents recorded the strongest rise of 3.4% QoQ to reach S$33.30 psf pm, while the prime suburban rents grew at 1.7% QoQ to S$30.30 in 4Q13. As outlook is still expected to remain sanguine, we thus believe CMT will continue to achieve positive rental reversions upon lease renewals.

Refinancing requirements likely addressed

We also note that CMT has been very active on its capital management lately. Specifically, CMT issued a JPY5b mediumterm note (swapped into S$62m at 3.148% interest rate) on 3 Feb and is currently offering a 3.08% retail bond to raise up to a maximum of S$350m. This will address not only the refinancing of its S$350m convertible bonds due Apr and S$150m medium-term note due Sep, but also extend its debt maturity to 2021. The progressive payments from the sale of Westgate Tower, on the other hand, will likely provide with additional resources for its growth plans. We maintain BUY and S$2.20 fair value on CMT.

Source: OCBC Research - 18 Feb 2014