CapitaMall Trust’s revenue up 6% to S$159.2m in 3Q11

3Q11 results broadly in line

3Q11 results broadly in line. CapitaMall Trust reported 3Q11 distributable income of S$77.4m, or a DPU of 2.42 S- cents, which is up 2.6% versus 3Q10; it also represents an annualized distribution yield of 5.10% based on the last traded price. 3Q revenue came in at S$159.2m, clocking an S$11.0m YoY increase mainly due to an additional S$4m from Illuma and S$7m from higher rentals. These results came in broadly in line with our expectations as YTD revenues and distributable income formed 77.1% and 72.2% of our FY11 estimates, respectively.

Operational numbers stay firm. We continue to see healthy occupancy across the portfolio at 96.0% which tracked down marginally due to enhancement works at Atrium@Orchard.

Positive rental reversions across the portfolio also continued into 3Q11 as we saw 353 new leases signed YTD with 7.5% higher rentals on average. CMT's debt maturity profile remained relatively well spread out with S$783m expected to be refinanced in FY12. The gearing ratio stayed stable at 38.4% versus 39.5% the previous quarter with the average term to maturity at 2.8 years.

Enhancement plans for Illuma announced. We expect to see asset enhancement works for Illuma take place from Nov 11 to 2Q12. Management guided that this would cost ~S$38m, and will expand the net lettable area by 4.9% to 194,306 sq ft and net property income by S$8.5m to S$19.6m annually.

This would translate to a 22.4% return on investment on the AEI cost and, as a result, the yield on total cost (including AEI) for Illuma would be boosted to 5.8% from 3.8% post-acquisition. We believe these targets are reasonable given CMT's track record of mall management and its current network of retail brands familiar to local consumers.

Expect Orchard outperformance over suburban. In 3Q11, average rentals for prime Orchard Road retail space increased 5.0% QoQ while prime suburban rents were up 2.9%. We also saw the flagship store of H&M at Orchard Building start operations with a well-attended launch. Going forward into FY12, we expect current rental trends of Orchard out- performance to continue as only 16% of the estimated 657k of retail total retail supply next year would be in the Orchard area.

Maintain HOLD with unchanged S$2.06 fair value. Management continues to deliver a solid performance with Illuma enhancements to be underway. At current prices, however, many positives are likely priced in and there could be limited catalysts ahead. We also have a preference for Orchard retail exposure over suburban at this juncture. Maintain HOLD at an unchanged S$2.06 fair value estimate.