3 reasons why CapitaMall Trust is now an attractive stock

Gearing and growth are looking bright.

Barclays Research upgraded its investment rating for CapitaMall Trust to Overweight due to three positive developments.

First was the removal of the overhang from the CB dilution. Second, the research firm said expectations for that the company will reach higher-than-sector gearing will improve with sales proceeds from Westgate Office Tower. Third and last, CapitaMall Trust malls are poised for better-than-expected growth.

This led Barclays Research for raise its estimated DPU by 4-7%.

Here's more from Barclays Research:

We upgrade CapitaMall Trust (CT) to Overweight based on: 1) removal of the overhang from the CB dilution; 2) expectations for its higher-than-sector gearing to improve with sales proceeds from Westgate Office Tower; and 3) better-than-expected growth from its malls. We raise our estimated DPU by 4-7% and upgrade to Overweight. At 6.0-6.3% forward yields and yield spreads of 3.5-3.8% vs historical spread of 2.2%, and -1 stdev below its historical mean P/B, we believe its attractive valuation more than factors in any short-term interest rate rise we expect by end-2015. Among SREITs, our top picks remain the office REITs, CCT and KREIT, which trade at lower P/Bs and could see a cyclical upturn.

Overhang removed: CT's share price has underperformed the general SREIT index ytd despite the company announcing solid FY13 DPU growth of 9% y/y and a resilient growth outlook. We believe the overhangs of CB conversion (potential share base dilution of 5%) and its above-sector gearing of 35.3% are now removed with the CB (to be redeemed at par) likely to expire out-of-the-money and refinanced, and proceeds from the divestment of Westgate Office Tower. Its well-spread debt maturity profile and high proportion of fixed debt (90%) should also mitigate rate rise concerns.

Stronger-than-expected growth: FY13 DPU grew 9% y/y to 10.27cts, 3% above our and Bloomberg consensus forecasts on a slightly better top line, with better margins. Operating statistics remain solid with 6.3% portfolio rent reversions, and 3% tenant sales and shopper traffic growth in FY13. The newest mall, Westgate Mall, seems to be coping well with surrounding Jurong Gateway competition.

Raise estimates, adjust PT: We raise revenues by 2% and bottom lines by a higher 4-7% for FY14-16E as the CB dilution is unlikely to happen. We now expect y/y FY14/15/16E DPU growth of 9%/2%/3% on a full-year contribution from Westgate in FY14 and, in addition to organic rent reversions, accretion from the AEI at Bugis Junction and Tampines Mall should contribute progressively in 2015-16E. We trim our DDM-based PT to S$2.19 from S$2.23 as we roll forward to higher estimates on a higher cost of equity assumption of 7.8%. With 18% potential share price upside, and a total potential return of 24% including the 6% yield, we upgrade to Overweight.