Upgrade to Neutral from Underperform. CMA hosted its FY10 results briefing yesterday. FY10 core earnings of S$272m were below expectations at 89% of our full-year forecast and 80% of consensus. The long gestation period for most of CMA's China malls continued to slow its bottom-line and NPI-yield improvements. Cap-rate compression in China has yet to come fast enough. Management has plans to improve NPI yields organically, leveraging its experience and past successes. With more malls maturing, CMA's growth visibility has improved, though the inflexion point for NPI should come only in 2012-13, in our view. We introduce 2013 forecasts. CMA's share price has held up well in the recent sell-down possibly on the perception that its China retail malls are a safer haven than residential properties. Our RNAV estimate and target price have been raised from S$2.15 to S$2.24 to factor in recent acquisitions. Valuations have turned more favourable after its 12-month underperformance, and we upgrade it to NEUTRAL. However, this set of results serves as a reminder that catalysts for further re-rating may take some time to materialise.
Results review. 4Q10 core net profit of S$40m was only 13% of our FY10 estimate and 10% of consensus. FY10 core earnings of S$272m form 89% of our forecast as high start-up costs for new malls affected CMA's China portfolio earnings. 4Q10 headline EBIT fell 26% yoy to S$163m following the divestment of three malls in Malaysia and Clarke Quay. The impact was only buffered by higher revaluation gains from properties in Singapore and China. Higher rental contributions from ION Orchard and fee income from its fund-management business also cushioned the drop. Average NPI yields rose slightly by 30-100bp in FY10 based on FY09 property valuations, indicating better rentals. That said, average NPI yields remained sub-optimal at 5.5-6.8% across Singapore, China and Malaysia. Such yields were still below CMA's target of 8-9% during its listing. Total NPI in Singapore and China increased 19-21% yoy as new malls came on stream. Balance sheet remained strong with a net-cash position as costs for recent land acquisitions in Singapore and China have yet to be booked.
Inflexion point for NPI to come only in 2012-13. Total NPI in Singapore and China increased 19-21% yoy as new malls came on stream. However, the gestation has been longer than expected as high start-up costs for malls in CMA's China portfolio (largely at associate level) continued to affect the bottom line. FY10 associate income from China remained in the red at -S$12m. Management intends to open 10 more new malls in the next two years.
CMA's China portfolio has yet to reach its full operational potential as: 1) many of the malls are still in the development stage; and 2) many of the completed malls remain young and have not reached operational stability. This is due for change, but likely only beyond 2012. In the typical management of retail malls, a rental cycle can take up to 3-4 years after a mall opens before its tenant mix stabilises. This is also the period when rental growth begins to take off. When the majority of its malls enter this stage, we estimate that NPI from its China portfolio could more than double by end-2013. Management aims to leverage its experience to extract better yields from its young malls. If successfully executed, the lead time could be cut short. For now, we expect over 40% of its China retail developments to stay in the infant stage, with the focus still on tenant and cost management.
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