CMT has proposed a fully underwritten and renounceable 9-for-10 rights issue to raise gross proceeds of S$1.23bn. About 1.5bn units will be offered at a price of S$0.82/unit, or a steep 43.4% discount to CMT's closing price of S$1.45 on 6 Feb 09. Proceeds will be used to repay S$956.2bn of debt and for committed asset enhancement work. Gearing will decline to 29.1% from 43.2%. Factoring in the dilution, our DPU estimates fall by 28-36% for FY09-11. Our target price falls accordingly to S$0.87 from S$1.66. For existing investors, we recommend a switch to smaller but cheaper peer Fraser Centrepoint (FCT SP, Outperform, S$0.61, target price S$1.06) for safety and stability. Maintain Underperform.

CMT proposed a S$1.23bn rights issue, to repay debt and pay for asset enhancements. The rights issue is renounceable and fully underwritten. Capitaland has committed to subscribe to 60% of the issue, including its pro-rata 29.7% share.

CMT needs to refinance S$956m of debt by Q309, which we believe is not difficult. We think the trust has done this rights issue to pre-emptively and decisively strengthen its balance sheet while there is still investor appetite and remove the overhang. With the steep discount of 28.7% to TERP of S$1.15/unit, we expect most investors to take up the right units.

We downgrade EPU and DPU by 30-50% post-rights, lower net property income, higher interest costs and repayment of convertible bonds in 2011. While widely expected, we believe the rights issue (50% of market cap) was larger and more dilutive than expected. We expect short-term weakness but maintain our 12-month Buy rating. CMT stands out as the largest SREIT with 2009E DPU yield of 8.6% (vs 10-yr bond yield of 2.1%) with resilient assets and excellent management.

Our 12-month DCF-derived valuation is S$1.25/unit and our PT of S$1.64/unit assumes a rights price of S$0.43/unit.

CMT proposed a S$1.23bn rights issue, to repay debt and pay for future asset enhancements. The EGM circular would be distributed to investors shortly and the EGM is expected to be held on 2 March. The ex-rights date is expected to be 4 Mar 09.

We downgrade our EPU and DPU by 30-50% to account for the following: The 9-for-10 rights issue which is expected to be 39% DPU dilutive and 31% NAV dilutive;

We assume net property income in the malls in the Central Area could be affected by lower retail sales and high supply in 2010-2012 and reduce the 2008-2012 CAGR from 4% to -3%. Overall portfolio net property income CAGR will still be 2% as we expect income from suburban malls to be resilient.

We now assume CMT may have to take on S$650m of bank debt to repay the convertible bonds in 2011. The current conversion price is around S$3.39/unit, compared to TERP of S$1.15/unit and post-rights NAV of S$1.66/unit.

Based on management guidance that cost of debt could attract margins of 300bps above swap rates, we have adjusted interest costs in 2011 onwards to 5% (from 4.5%).

While widely expected, we believe the rights issue was larger and more dilutive than investors expected. We expect short-term weakness in the stock price when trading commences but maintain our 12-month Buy rating. CMT stands out as the largest SREIT with 2009E DPU yield of 8.6% (vs 10-yr bond yield of 2.1%), with low gearing, a resilient asset class and excellent management. With debt now below S$2bn, we believe the rights issue has removed virtually all doubts about CMT’s capital structure, even if steep declines in asset values are expected.

Our DCF-valuation is S$1.25/unit. Our new price target of S$1.64/unit assumes the rights could be worth S$0.43/unit (difference between DCF-value and right price of S$0.82/unit), where each unit has around 0.9 rights.