PRICE as of 30 Oct 2013 SGD 2.05
PRICE TARGET SGD 2.24
Operational improvements priced in
•CapitaMalls Asia’s (CMA) 3Q13 earnings were in line with our and consensus estimates.
• We believe retail sales recovery in China is priced in. CMA outperformed the sector by 12% in the past four months.
• Operational assets are maturing and CMA would need to keep investing to sustain growth momentum.
• We downgrade CMA to In-Line from Outperform with a revised SGD 2.24 price target (from SGD 2.29).
Retail sales recovery in China priced in. CMA‟s 3Q13 PATMI of SGD 64.8mn was in line with our and consensus estimates. Weak China performance in 4Q12-1Q13 was reversed over 2Q13-3Q13, with tenant sales growing c.10.5% y/y (from 7.7% y/y) and shopper traffic growing 3% y/y (from -0.6% y/y). We think this is priced in, as CMA outperformed the sector by 12% in the past four months.
Growth slowing as China assets mature: Operational assets now comprise c.75% of its NAV. NPI growth in China is slowing as the assets age, with 2005-08 vintage malls now achieving just 6- 8% y/y growth. CMA‟s exposure to low-yielding Singapore assets is also increasing: we estimate it would directly own c.SGD 2.7bn of completed Singapore retail malls by end-2013. While earnings momentum should remain strong in the next four years, we believe CMA has to keep investing in new development projects to sustain future growth. Management announced just one new development project in 2013.
Downgrade to In-Line from Outperform. CMA trades at 1.15x book and 0.82x RNAV, close to the historical averages. We believe operational strength is adequately priced in. We lower our RNAV by 2% to SGD 2.49 and revise our price target to SGD 2.24 (from SGD 2.29), still set at 0.9x RNAV.
Upside risks to our call: (1) If Westgate‟s 320,000sf office component is strata-sold, per a 22 August 2013 Business Times report, at SGD 2,000psf, implying a c.3.5% exit yield. CMA could book divestment gains of c.SGD 130mn if this materialises. (2) If CMA sells ION Orchard or Star Vista to fund higher IRR projects. (3) If CMA announces a new development project with attractive profit margins.
Publish date: 30/10/13