CapitaLand Mall Trust - OCBC Investment 2016-03-03: Time for a breather, downgrade to HOLD

CapitaLand Mall Trust - OCBC Investment 2016-03-03: Time for a breather, downgrade to HOLD CAPITALAND MALL TRUST C38U.SI 

CapitaLand Mall Trust: Time for a breather, downgrade to HOLD 

  • Performed well since our upgrade in Nov
  • Valuations now appear fair
  • Weak retail climate

Top share price performer within S-REITs sector 

  • CapitaLand Mall Trust’s (CMT) share price has appreciated 11.9% YTD, making it the top performing S-REIT. 
  • It has strongly outperformed the STI and FTSE ST REIT Index, which have declined 5.4% and risen 3.3% YTD, respectively. 
  • We believe CMT’s robust share price performance can be attributed to a flight to safety by investors, as the blue chip S-REITs with high quality assets have largely performed better in light of the vagaries surrounding the macroeconomic landscape and volatility in the financial markets. 

Valuations now appear fair, downgrade to HOLD 

  • We upgraded CMT to a ‘Buy’ on 30 Nov last year, and highlighted then that its risk-reward was compelling, when its trading yield was close to two standard deviations above its 5-year forward average. 
  • Since then, CMT’s share price has jumped 15.2%, thus compressing its FY16F distribution yield to 5.3%. This is approximately half a standard deviation below its 5-year average yield of 5.5%. 
  • CMT’s FY16F P/B ratio of 1.14x is in-line with its 5-year mean of 1.16x. We opine that valuations are now fair, and while we maintain our fair value of S$2.10, we downgrade the stock to HOLD on valuation grounds. 

Expected to stay resilient, but headwinds cannot be ignored 

  • Looking ahead, we believe headwinds facing the retail sector would continue to pose challenges for retail REITs such as CMT. 
  • Singapore’s retail sales remained tepid for the month of Dec 2015. Although overall growth came in at 2.9% YoY, this was driven by motor vehicles. Excluding this, retail sales would have fallen 3.6% YoY. 
  • Meanwhile, according to statistics from URA, rentals of the private sector retail space in the Central Region dipped 1.3% QoQ in 4Q15, representing the fourth consecutive quarter of decline. 
  • For 2015, rentals of retail space came in lower by 4.1%. Given this backdrop, it was not surprising that CMT registered a moderation in its rental reversion to 3.7% in FY15. 
  • While there would be further pressure ahead, we expect CMT to remain resilient and continue delivering positive rental reversions in FY16. 

Wong Teck Ching Andy CFA OCBC Securities | http://www.ocbcresearch.com/ 2016-03-03
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