CapitaLand Mall Trust - Maybank Kim Eng 2016-04-12: Flat DPUs, but yield target revised

CapitaLand Mall Trust - Maybank Kim Eng 2016-04-12: Flat DPUs, but yield target revised CAPITALAND MALL TRUST C38U.SI 

CapitaLand Mall Trust (CT SP) - Flat DPUs, but yield target revised 

Revise yield targets due to negative rates 

  • Fundamentally, our views have not changed. DPUs tweaked lower 0.6% as we believe supply pressures will weigh on occupancy and rent reversions. 
  • Tenants also face high occupancy costs. Having said that, yield targets have to be revised lower in the face of a negative interest rate environment and collapsing long bond yields (see sector note). 
  • CT’s yield is currently 5.2%, close to its -1SD, but we re-peg CT’s yield target to 5.7% (from 6.75%), mid-way between the -1SD and the mean to reflect our negative view on the retail sector. 
  • Applied to FY16 DPU, TP is revised +18% to SGD1.97. Maintain SELL. 

Occupancy and reversions under pressure 

  • Occupancy declined in 2015 to 97.6% from 98.8% (2014), and reversions tapered to 3.7% from 6.1% over the same period. 
  • As supply is set to increase formidably at 2.4% CAGR 2016-18, c.2.1x historical demand, this will keep a lid on reversions, as well as exert downward pressure on occupancy, unless the economy picks up significantly. 
  • We expect occupancy to edge lower to 97.1% in 2016, and reversions to taper again to c.2.8%. 
  • We note that last year saw negative net absorption of retail space: -0.3m sf. Nearly zero in the outside central region, -0.3m in the central region. 

Occupancy costs above historical average 

  • While shopper traffic and tenant sales both advanced 4.9% and 4.4% YoY, this did not translate into stronger reversions as tenants are facing high operating costs, not just from the on-going labour crunch, but also occupancy costs being at 18.5%, some 183bp above the 16.7% long-term historical average. 

Flat DPU outlook: Bedok offset by Funan 

  • Our revenue, NPI, DPU outlook for FY16 is relatively flat: +2.8%/+2.8%/+0.1%. This is driven mainly by Bedok Mall’s full year inclusion but offset somewhat by Funan’s closing mid-2016, as well as a greater unit base due to equity issuance for Bedok. 
  • The market eagerly awaits redevelopment plans for Funan, which if well received could be a long-term DPU catalyst.

Joshua Tan Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-04-12
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.97 Up 1.66