CMT sale of Hougang Plaza a smart move: DBS

The divestment will help CapitaMall Trust cut down debt and allocate funds for its more important malls.

CMT has ongoing AEI works in Clarke Quay, Illuma and The Atrium -- all off which will be done by June -- and are considered "more value accretive sources" of earnings by DBS compared to upgrading Hougang Plaza to compete with glitzier neighborhood rivals.

Here's more from DBS:

Proposed sale of Hougang Plaza. CapitaMall Trust ("CMT") has entered into an agreement to sell Hougang Plaza for S$119.1m or S$1580 psf of NLA to Oxley Bloom Pte Ltd. After taking into account the divestment fees and other divestment related expenses, net proceeds would be c.S$117.8m.Located in Hougang Central, Hougang Plaza is a three-storey shopping mall with a net lettable area of 75,353 sf. The mall has a committed occupancy of 100% as at 31 March 2012, and contributed about 0.5% to CMT’s NPI in 1Q12.

Locks in a nice $83.8m gain. We believe the sale was conducted as part of CMT's portfolio evaluation strategy in looking to divest non-core and non-performing malls. The sale price is 2.5x above the latest valuation of $34m as at Dec 2011 and 2.4x its initial investment of S$49.1m for the asset. Upon divestment, CMT is expected to reap a gain of $83.8m from the sale. The sale is expected to be completed on or about 13 June 2012.

Positive impact on earnings, but marginal due to the small asset base. We estimate the exit yield of the divestment is c. 2% vs the current underlying yield of 6%. We think that Oxley Bloom Pte. Ltd could be buying the mall for redevelopment purposes. Assuming that the proceeds are used to pay down debt, based on the current all-in-interest rate of 3.3%, we expect CMT to see some interest savings. Our FY12/13F DPU will see a marginal uplift (+1-2%). Gearing is expected to remain unchanged at 42%, after accounting for its planned investments in various AEI projects in the upcoming quarters.

Portfolio rejuvenation. Given the ageing mall and relative small footprint, we view this divestment positively. In our recent visit to the mall, we observe the mall needs significant capex to maintain it and sharpen its competitive edge in view of those nearby (e.g. Hougang Mall, Nex) and upcoming. We believe the divestment will give the company improved financial flexibility to redeploy funds to other more value accretive sources and strengthen the portfolio going forward. Meanwhile, the gradual completion of the AEI works at Clarke Quay, Illuma and The Atrium in the 2H will continue to lift earnings and rejuvenate its portfolio in the medium term.

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