CapitaLand Mall Trust - Now NEUTRAL On Expected Rental Growth Slowdown
- We downgrade CapitaLand Mall Trust (CMT) to NEUTRAL as we expect the challenging retail climate to impact its rental growth.
- Amid tough market conditions, the REIT has embarked on an effort to transform Funan DigitaLife Mall into an integrated mall of the future – which we view as a long-term positive.
- At its current share price levels, CMT offers forward yields of 5.6% and is trading at 1.1x FY17F P/BV, which we deem to be fair.
- Downgrade to NEUTRAL, with a lower TP of SGD2.07 (from SGD2.36, 4% upside).
Expect muted rental growth ahead.
- We expect CapitaLand Mall Trust’s (CMT) rental growth to slow down to 1% this year, compared to its 10-year average growth of 6% pa. This comes as the Singapore retail sector undergoes a structural transformation amidst challenging macro-economic conditions.
- Retail demand remains weak with the seasonally adjusted retail sales index (excluding motor vehicles) continuing to decline by 2.1% YoY and 0.3% QoQ in Nov 2016. On the supply side, about 3.3m sq ft (9% of total inventory) is expected to come on-stream over the next three years, pressuring rentals. Amid these challenges, we expect only defensive suburban malls situated in areas with a good catchment population to remain resilient.
Mall redevelopment positive for long-term growth.
- Funan DigitaLife Mall, which was closed on Jul 2016 for redevelopment works, has been demolished. Redevelopment works are expected to be completed by 4Q19. The mall is set to be transformed into an integrated project comprising two office towers, service residences and a retail space (total development cost: SGD560m). We are positive on this, and believe retailers need to differentiate and incorporate futuristic elements to keep themselves ahead of the competition to stay relevant.
- Other recent asset enhancement initiatives (AEIs) that may benefit positively include the refurbishment of Plaza Singapura and Tampines Mall.
Downgrade to NEUTRAL with a lower TP of SGD2.07.
- We trimmed our FY17F-18F DPU by 2%/4% by reducing our retail rental growth assumptions to 1% from 3%.
- We now expect full contributions from the redevelopment of Funan DigitaLife Mall to kick in only by 2020.
- At the current share price levels, the stock offers a FY17F yield of 5.6% and is trading at 1.1x P/BV – which we deem as fair.
- Key re-rating catalysts are a pick-up in retail consumption demand, the successful transformation of Funan DigitaLife Mall and accretive asset acquisitions.