Capitaland's Jurong site to strengthen property values in the west

Our recent site visit to CMA/CMT/ Capitaland’s Jurong Gateway site at Boon Lay Way has reaffirmed our view that this acquisition is a strategic defensive move on their part to deepen exposure in the upcoming Jurong Lakeside regional hub area and further strengthen their positioning as a major landlord within this enclave in the medium term. Jurong Lakeside regional hub is expected to grow to 2.5x that of Tampines regional hub with a sizeable working and resident catchment. This is likely to have positive impact on property values in the longer run.

Growing their presence in the locality to an estimated 1msf retail NLA is likely to enhance their landlord value proposition and improve their ability to be rental price makers rather than takers in the medium term. The group plans to offer a range of offerings with IMM targeted to be a value-focused mall, JCube an entertainment focused positioning and Jurong Gateway site a family lifestyle shopping complex, to enhance shopper experience in the vicinity. With the latter site to be seamlessly integrated and highly accessible to nearby amenities and transport nodes, we expect pedestrian traffic to be high in the malls. JCube is on track to open in early 2012 while the retail portion of the new Jurong Gateway property is expected to be operational by Dec 2013, in tandem with the Lend Lease development.

We maintain our Buy calls for CMA, Capitaland and CMT as we see this deal as being accretive and represent a deployment of balance sheet capacity into higher yielding opportunities. Immediate impact on valuations is likely to be mild with an initial yield on cost of c5.9-6% but we believe upside can be generated as the regional hub matures and as operational synergies kick in. Our RNAV and TP for CMA are raised by 1ct to $2.29 and $2.51 respectively on new contributions from its 50% stake.

Capitaland’s RNAV remains unchanged at $5.43 due to its small 20% share.
Capitaland offers value as one of the big-cap laggards trading at 0.94x P/bk and 0.6x P/RNAV. For CMT, our DCF-backed TP is lowered slightly to $2.05 due to a small near term earnings dilution 0.5-3% on increased interest expense during the development period. When completed in FY14, the new income could boost DPU by 3-4%. CMT is currently trading at FY11 and FY12 DPU yields of 4.9-5.4%.