The largest landlord of retail malls in Singapore, CapitaMall Trust (CMT) offers exposure to many well-frequented malls across the four corners of Singapore. Its properties are well-located in the suburbs and even downtown, each catering to a sizeable catchment area of shoppers. CMT was the first-ever REIT to be listed in Singapore in 2002.

Since then, CMT has proven to be an innovative landlord, pioneering the art of asset enhancement initiatives (AEIs) to optimise space and rentals. AEIs will underpin CMT’s organic growth for the next three years at least. CMT historically trades at an average yield spread of 2.9% over the 10-year bond yield. Its current yield spread of 4.8% still makes it relatively attractive at this price level, relative to its own yield band of between 3.6-11.5%.

Other than Raffles City, CMT’s malls are largely located in the suburbs, catering to necessity shopping. Even Plaza Singapura that is located at the end of Orchard Road is positioned more as a neighbourhood mall, with hypermart Carrefour as the anchor, than high-end malls. CMT’s portfolio of malls has consistently achieved high occupancy rates of over 99% since 2001, with an estimated average retail passing rent of $11.80 psf per month.

Following the 9-for-10 rights issue to raise $1.2bn, CMT will be using part of the proceeds torepay $956m of debt due in 2009, thus bringing down its gearing from 43% to 29%. Most of the balance of the proceeds will be used for the AEIs at Jurong Entertainment Centre and the Atrium @Orchard. CMT is also exploring opportunities to increase the retail GFA of Funan DigitalLife Mall and Tampines Mall.

We like CMT for its market leader position, strong quality of assets, healthy balance sheet and its strong management backed by a reputable sponsor in CapitaLand. In difficult times like these, CMT’s vast potential for organic growth and earnings resilience deserve a premium. We are initiating coverage with a BUY recommendation at the target price of $1.53, based on our DDM valuation.