CapitaLand Mall Trust - Maybank Kim Eng 2016-07-24: Defensive low growth, but Funan could excite

CAPITALAND MALL TRUST C38U.SI

CapitaLand Mall Trust (CT SP) - Defensive low growth, but Funan could excite

If not for Bedok Mall, growth would have been flat. But the fact that 79% of net property income is from non-discretionary retail underpins the defensiveness of its earnings.
We U/G to HOLD, revising TP higher by 6.5% to SGD 2.10, purely due to the yield compression environment that supports lofty valuations.
Target yield is revised from 5.7% to 5.4%, which is 1SD below the mean.
Downside risk would be a rate raising cycle.

Rev/NPI/DPU grew 7%/6%/1% YoY, mainly due to the acquisition of Bedok Mall in 4Q15, followed by stronger contributions from Tampines Mall and IMM post asset enhancements. These were offset by the absence of Rivervale Mall (sold in 4Q15), as well as the winding down of Funan.
Operating conditions are tough, rev/NPI growth on a same mall basis was merely 0.7%/0.6% YoY.
Encouragingly, despite rent reversions tapering to 1.7% (FY15: 3.7%), occupancy across the portfolio was steady at 97.9% (1Q: 97.7%).
A weak retail environment coupled with supply at twice annual demand till 2018 is likely to keep DPU below 2% growth.

While organic growth may be tepid, the redevelopment of Funan to 611k sf of NLA vs. 219k sf at present, promises to accrete DPU by c.9% in FY20 (forward yield: 5.8%), as management expects 6.5% ROI on estimated SGD 560m costs.
We reckon the estimates are very conservative as the guided topline of SGD47.5m, which implies a rent of SGD 6psfpm, low by any measure. Funan has historically achieved about SGD 8.5psfpm.

In explaining the concept of the new Funan, we were glad to detect a sense of urgency from management to take on the structural challenges facing retail now: a tired product of the same chains, high labour costs, e-commerce threat, and ambivalent consumption attitudes from millennials.
Instead, taking the cue of its location in the Art & Civic District, the new Funan promises experiential retail (“reimagine... shops without walls”), collaborative office space, a high-degree of technology interface, and conducive to personal transport devices (scoots, bicycles).
We eagerly await the unveiling of the detailed plan.

Joshua Tan Maybank Kim Eng | Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-07-24

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