CapitaLand Mall Trust - UOB Kay Hian 2016-07-25: 2Q16 Clouds Looming On The Horizon

CapitaLand Mall Trust - UOB Kay Hian 2016-07-25: 2Q16 Clouds Looming On The Horizon CAPITALAND MALL TRUST C38U.SI 

CapitaLand Mall Trust (CT SP) - 2Q16: Clouds Looming On The Horizon

  • Negative rental reversion is likely to continue in 2H16, with increased pressure on rentals as retailers are buffeted by high labour costs and the ubiquity of online retail platforms, should lead to moderating shopper traffic and tenant sales. 
  • The S$560m redevelopment of mixed-use Funan Digitalife Mall (6.5% ROI) is slated for completion in 4Q19, and is expected to be wholly debt-funded. 
  • Maintain HOLD with a reduced target of S$2.18 (from S$2.24). Entry price: S$1.90.



RESULTS


Results in line with expectations. 

  • 2Q16 DPU of 2.74 S cents came in within our expectations, with 1H16 representing 49.0% of full-year forecast. 
  • 2Q16 gross revenue and net property income saw respective increases of 7.1% yoy and 6.0% yoy, on the back of contributions from recently-acquired Bedok Mall as well as higher rents for IMM building, Tampines Mall and Bukit Panjang Plaza post renovation.


STOCK IMPACT


Funan redevelopment. 

  • Envisioned as a new-generation integrated development, the S$560m project (611,000 sf by NLA) will consist of 53.5% retail space, 33.3% office and 13.1% serviced residences (potential 400 car park lots) in the revitalised civic and cultural district of Singapore. 
  • The expected ROI of 6.5% takes into account stamp duty and expected capex on technological requirements. The redevelopment is expected to be wholly debt-funded, with management pointing to sufficient debt headroom of approximately S$800m assuming comfortable 40% debt limit. 
  • Management remains open to leveraging on the expertise of sister REITs CCT, ART and sponsor CapitaLand in potential tie-ups.

Rental reversions slowing down despite healthy shopper traffic. 

  • Tenant sales were up 2.3% yoy while shopper traffic grew 3.6% yoy. However, rental reversions have decelerated sharply to 1.7% for 1H16 from long-term average of 6.7%. 
  • Management continued to guide for a possible quarterly negative rental reversion on a portfolio basis in 2H16, despite positive growth in shopper traffic and tenant sales this quarter. 
  • High labour costs, the ubiquity of online retail platforms and the strengthening Singapore dollar bringing in a different set of tourists have contributed to the challenging leasing environment. Management has acknowledged moderating growth in shopper traffic seen in the quarter, despite partial seasonal impact post Chinese New Year in 1Q16.

Challenging retail environment. 

  • 2Q16 saw overall shop rentals fall 3.9% qoq (-8.9% yoy), an acceleration compared with previous quarterly declines. This marks the sixth consecutive quarter of decline and also implies the prevalence of a tenant's market in the retail scene. 
  • The retail environment is expected to remain challenging due to increased supply, rising costs and threat from alternative retail channels. CBRE expects this to persist in the medium term, with landlords increasingly taking defensive steps like forward renewals to sustain occupancy levels.


EARNINGS REVISION/RISK

  • We lower our 2017 and 2018 DPU estimates by about 1.8% to account for potential negative rental reversions in 2H16 and lower reversions in 2017. We have factored in earnings contribution from the Funan AEI project in 2020.


VALUATION/RECOMMENDATION

  • Maintain HOLD with a reduced target of S$2.18/share (from S$2.24) as we factor in the reduced DPU. Our valuation is based on DDM (required return: 6.3% and terminal growth of 1.5%). 
  • Entry price is S$1.90.


SHARE PRICE CATALYST

  • Positive newsflow on retail rentals, consumer spending, wage increments and mall occupancy.




Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-25
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 2.18 Down 2.24


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