CapitaMall Trust (CT) goes ex-rights from today, after the announcement of a 9-for-10 rights issue to raise S$1.23bn. We revise our DCF valuation and target price to S$1.45 (from S$2.95 previously) to reflect the enlarged unit base, and maintain our Outperform recommendation.

The rights price of S$0.82 represents a 43.4% discount to its last closing price of S$1.45 at the time of announcement, and 28.7% discount to the theoretical ex-rights price (TERP) of S$1.15 per unit. The new units will rank pari passu with existing units, thus will be entitled to distributions from 1 January 2009. Improved credit profile: Borrowings of S$956.2m (30% of total debt) due within 2009 will be paid down, with the balance for committed asset enhancement initiatives, likely at The Atrium@Orchard and the Jurong Entertainment Centre. Gearing is expected to be reduced from 43.2% to 29.1% as a result.

Strong operationally, resilient portfolio: Portfolio occupancy was a high 99.7% as of 31 December 2008, with 87% of FY09 income secured by renewed leases so far. About 78.6% of gross revenue comes from necessity shopping, which is more resilient in a downturn. Despite a weak 4Q08 in terms of a 17% QoQ GDP contraction, CT's portfolio showed resilience as shopping traffic rose circa 5–6% QoQ and 10.3% YoY.

Committed to tenant retention: The 2009 Budget announcement provided for 40% commercial property tax rebates, which CT will pass through to tenants. In a show of support for their tenants, about 680 managerial staff from sponsor CapitaLand will be given a total of S$1m in shopping vouchers as a small proportion of their bonuses this year. These vouchers will be redeemable at CT’s shopping malls, as a means of directing some cashflow back to tenants.

FY09–11 DPU estimates lowered by ~42% to reflect the enlarged unit base. DPU for FY09 is S¢8.38.

12-month price target: S$1.45 based on a DCF methodology. Catalyst: Stock goes ex-rights from today. CapitaMall Trust remains one of our top picks in the SREIT space. It has a proven track record of driving DPU through active leasing, asset enhancements and acquisitions.