CIMB Research 2015-07-22: CapitaLand Mall Trust - Steeper Inorganic Growth Path. Upgrade to ADD.

Steeper inorganic growth path 

  • CMT’s 2Q/1HFY15 DPUs were in line, at 24%/47% of our full-year forecasts. 
  • Challenges faced by retailers have translated to lower occupancy and rental reversion, but we are encouraged by the pick-up in shopper traffic and tenant sales. 
  • We expect mild organic growth from improved occupancy and positive rental reversion for 2H15. 
  • In addition, we like that CMT appears to be on a steeper inorganic growth path with its proposed acquisition of Bedok Mall and the potential redevelopment/disposal of Funan. 
  • We upgrade CMT from hold to Add with a higher DDM-based target price. 
  • We also roll-forward our estimates, partially offset by lower FY15-17 DPUs as we tweak rent estimates. 
  • Potential catalysts are better operating performance and plans for Funan. 

Results highlight 

  • CMT’s 2Q/1HFY15 DPUs were in line, at 24%/47% of our full-year forecasts. 
  • The challenging retail environment led to lower rental reversion of 4.6% and a drop in occupancy from 97.2% in the previous quarter to 96.4% in 2Q. 
  • However, we are encouraged by the increase in shopper traffic (3.4% yoy) and tenant sales (2.9% yoy). 
  • Valuations of the portfolio generally increased across the board, with the exception of JCube and Westgate. 

Mild organic growth… 

  • We expect occupancy to improve and rental reversion to remain mildly positive. 
  • The quarter’s dip in occupancy is partly due to AEI at IMM and the exit of major tenant LifeBrandz at Clarke Quay, and is likely to be temporary. 
  • The 57,000 sq ft of space vacated by LifeBrandz at Clarke Quay will be reconfigured to house new entertainment and F&B tenants, and Zouk has committed to 31,000 sq ft. 
  • While the Jurong cluster of IMM, JCube and Westgate could remain weak given the oversupply situation, we note that together, they make up ~14% of the portfolio 

NPI. …but on a steeper inorganic growth path 

  • We upgrade CMT from hold to Add and think its attractive at 5.1%/5.3% FY15/16 dividend yield. 
  • It appears to be moving towards steeper inorganic growth, given its acquisition of Bedok Mall and intention to relook at its options for Funan. 
  • Aside from disposal, we think CMT is well-positioned to redevelop Funan to make use of the un-utilised GFA given its portfolio size of ~S$9bn and the proposed increase in the regulatory development limit.
  • Target Price: S$2.37 (prev S$2.25).

(TAN Xuan, CFA; PANG Ti Wee; LOCK Mun Yee)