UOB Kay Hian Research 2015-07-15: Keeping It Within The Family. Maintain BUY on CapitaLand, Upgrade CMT to HOLD.

Keeping It Within The Family


  • CMT’s acquisition of Bedok Mall from its sponsor CapitaLand is of mutual benefit for both. 
  • We upgrade CMT to HOLD (from SELL) and raise target price by 2% to S$2.17 as we factor in the acquisition. 
  • The acquisition extends CMT’s heartland footprint with increased exposure to necessity consumption and further diversifies its income streams. 
  • CapitaLand will book in a divestment gain of S$30m (S$100m on cost), in line with management’s capital recycling strategy to boost ROE. 
  • Maintain BUY on CapitaLand with an unchanged target price of S$4.08. 


WHAT’S NEW 


  • CapitaLand Mall Trust (CMT) announced the acquisition of Bedok Mall from CapitaLand (CAPL) yesterday for S$783.1m. 
  • The acquisition is expected to be funded through a combination of debt and consideration units payable to CapitaLand. 


ESSENTIALS 


CapitaLand Mall Trust (CT SP/HOLD/Target:S$2.17) 


 Acquisition to increase penetration in heartlands and diversify revenue. 

  • The acquisition would extend CMT’s heartlands footprint to the heart of Bedok. It also increases CMT’s exposure to necessity spending from 74.5% to 76.2%. 
  • In addition, gross revenue from any single property within the portfolio is expected to decrease from 12% to 11.2%, leading to greater diversification and less reliance. 

 Issuance of consideration units to CAPL as partial payment increases sponsor alignment. 

  • Some 72m CMT units will be issued to CAPL, which works out to S$154.8m assuming a volume-weighted average price of S$2.15 over the last 10 days. 
  • This would increase CAPL’s stake in CMT from 27.9% to 29.4%, which we find reassuring as it demonstrates CAPL’s continued faith in CMT. 
  • The consideration units would be subject to a moratorium period of a year. 

 Property yield in line with trading yield, DPU accretion mainly through debt. 

  • Bedok Mall has a yield of 5.1%, broadly in line with CMT’s current trading yield of 5.1%. 
  • Assuming a 81:19 debt:equity split, and borrowing cost equivalent to CMT’s current allin borrowing cost of 3.4%, this would result in a 2% growth in DPU. 

 Upgrade to HOLD

  • Upgrade to HOLD with a higher target of S$2.17, based on DDM (required rate of return: 6.75%, terminal growth: 1.8%). 
  • Entry price is S$1.84. 
  • Purchase consideration in line with market valuation. 
  • The purchase consideration of S$780m, or S$3,506psf of NLA, is in line with the average of property consultants’ valuations (Knight Frank: S$779m, DTZ: S$781m). 

 Debt headroom to remain comfortable post acquisition. 

  • Gearing would increase from 33.8% to 37.2%, assuming CMT issues its consideration units at S$2.15 each. Assuming a gearing limit of 45%, this would leave CMT a debt headroom of about S$1.04b. 


CapitaLand (CAPL SP/BUY/Target:S$4.08) 


 Minimal impact on RNAV. 

  • The sale consideration of S$780m is in line with our expectations, leaving our RNAV of S$5.11/share largely unchanged. 
  • The sale of Bedok Mall would result in divestment gains of S$30m on the revalued book and S$100m gains on initial cost. 

 In line with management’s capital recycling strategy. 

  • The proposed divestment of Bedok Mall is the latest in a string of recent capital recycling initiatives by CAPL. 
  • Among them were the divestment of serviced residences and rental housing properties to Ascott REIT, as well as the divestment of PWC building, both in June. 

 Maintain BUY 

  • Maintain BUY and target price of S$4.08 based on a 20% discount to our RNAV of S$5.11/share.


(Vikrant Pandey, Derek Chang)

Source: http://research.uobkayhian.com/




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