CapitaLand Retail China Trust - DBS Research 2016-08-22: FX a near-term headwind

CapitaLand Retail China Trust  - DBS Vickers 2016-08-22: FX a near-term headwind CAPITALAND RETAIL CHINA TRUST AU8U.SI

CapitaLand Retail China Trust - FX a near-term headwind

  • Acquisition of Galleria mall in Chengdu for total investment cost of Rmb1.53bn and 5.4% NPI yield.
  • Opportunity to achieve higher NPI yield through tenant remixing and leveraging on CapitaLand’s strong network of five existing malls in Chengdu.
  • 1-4% accretion to FY16-17F DPU. 



Currency an unfortunate hindrance. 

  • We maintain our HOLD call with a revised TP of S$1.65. While we remain positive on CRCT’s medium-term outlook, forecasting an 8% 3-year NPI CAGR in RMB terms, the recent depreciation of the RMB versus SGD might cap CRCT’s near-term performance as seen by the 4% y-o-y decline in 2Q16 DPU. 
  • However, should there be any share price weakness we would use it as an opportunity to gain exposure to the growing Chinese consumption story.


Earnings still gestating. 

  • The potential of CRCT’s malls have not been maximised as several properties are still ramping up or in a transition phase. These include 
    1. Grand Canyon (acquired in 2014) which is generating an annualised NPI yield of only c.5.4% (based on the original acquisition price) versus target range of 7-8%, 
    2. Minzhongleyuan and Wuhu which are incurring losses due to nearby road closures and reposition works respectively, and 
    3. the recently announced acquisition of Galleria mall whose margins are sub-optimal owing to previous management by third-party operators. 
  • Upon stabilisation of these properties and continued growth at CRCT’s other multi-tenanted malls, we project a 8% p.a. growth in NPI (in RMB terms) over the next three years.


Upside from acquisitions. 

  • Post the acquisition of Galleria mall, CRCT’s gearing will rise to 36-37% but will still be below the 45% limit imposed by MAS. With some debt headroom and our understanding that price expectations from potential sellers are now lower, there may be further acquisition prospects for CRCT.

Valuation

  • After incorporating the acquisition of Galleria mall in Chengdu, we raised our DCF-based TP to S$1.65 from S$1.60 previously.

Key Risks to Our View

  • Acquisitions. Upside will come from potential acquisitions that management may be reviewing. We have not factored any additional acquisitions in our numbers at this point.




Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-08-22
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 1.65 Up 1.600


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