Is it a match made in heaven or the start of a nightmare? On 29 September, unitholders of CapitaLand Mall Trust (CMT) and CapitaLand Commercial Trust (CCT) voted in favour of the merger between the two REITs. However, CMT share price fell from $2.00 on 30 September to $1.90 on 2 October. What on earth happened to CMT share price?
Apparently, some investors were puzzled by the bearish form of CMT share price and wrote in to seek my insights. Hands on heart, I view the merger positively because it will lead to the largest REIT in Singapore and provides higher trading liquidity. The issue now is whether the acquisition takes place at the right time.
With CMT struggling to deal with the fallout from COVID-19 pandemic, it seems that CMT could be biting more than it could chew. In fact, on 1 October, Moody’s downgraded the credit ratings for CMT from A2 to A3. The downgrade soured the outlook for CMT share price.
To support the acquisition, each CCT unit would be acquired at 0.720 new CMT Units and $0.2590 in cash. The issuance of new shares would definitely weigh on CMT share price. To put things into perspective, about 2.8 billion new CMT shares would be issued. This represented an increase of 76% number of CMT shares. Post-acquisition, the theoretical CMT share price could be $2.00 /1.76 = $1.14.
As one of the readers pointed out, for CMT share price to reach $1.10 would mean that the market is assigning zero value to CCT assets. This will be an unrealistic assumption. A more reasonable medium term forecast for CMT share price should be somewhere $1.60 to $1.70.
Obviously, CMT share price may not correct to the level of $1.10 because a lot also depends on market conditions. When the merger was announced in January 2020, CMT share price was in buoyant mood. But COVID-19 came along and messed up everything. For 1HFY2020, DPU plunged 49% year-on-year to 2.96 cents. So even though the merger is supposed DPU accretive, the DPU may be reduced as CMT may retain more of its taxable income due to COVID-19 pandemic.
Note that this is an opinion article and not meant to be a financial advice. Please do your due diligence or engage financial advisors before investing in the stock market. Furthermore, I am not vested and have never invested in CMT before. Whether CMT share price will surge or collapse has no impact on me. Thus, this article is not meant to induce readers to make any form of investment decisions.
CMT share price in trouble?
To be frank, I was quite surprised that CMT decided to push ahead with the acquisition, which was announced prior to the COVID-19 pandemic. Given the severity of the fallout from the virus, most investors can understand if the management decided to postpone the deal. Year-to-date, the virus had caused CMT share price to plummet 22%. The merger is going to weigh on CMT share price because of the issuance of the large number of new shares.
CMT share price took a beating when the 1HFY2020 result was released on 22 July. The REIT reported a stunning [This is a premium article. The rest of the content is blocked and can be accessible by SG Wealth Builder Members only. To read the full content, please sign up as member.]
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