CapitaLand Retail China Trust - Phillip Securities 2017-04-25: Positives Priced In

CapitaLand Retail China Trust - Phillip Securities 2017-04-25: Positives priced in CAPITALAND RETAIL CHINA TRUST AU8U.SI

CapitaLand Retail China Trust - Positives priced in

  • CapitaMall Xinnan and revived CapitaMall Minzhongleyuan drove earnings growth. Overall results were within our expectations.
  • 1Q17 3.6% rental reversion, within our expectations for full year single digit reversion.
  • Expect further rising interest costs q-o-q towards 4Q17 as majority of expiring debt gets refinanced.
  • Maintain NEUTRAL with unchanged DDM-derived target price of S$1.44.

What is the news and what do we think? 

Executed well on CapitaMall Xinnan as promised.

  • CapitaMall Xinnan achieved a 13.7% y-o-y rental reversion. Recall that the mall had a 5.4% yield on cost at acquisition (vs FY15 portfolio NPI yield of 5.8%). Management then expressed optimism at pushing this up to > 6% over the next three years through topline growth and improving operating efficiency. We will continue to monitor the remaining leases expiring (13.9% of NLA) for further progress of rejuvenation at the mall. 
  • CapitaMall Minzhongleyuan benefitted from the re-opening of Zhongshan Avenue and new Metro line. The mall recorded > 90% and > 60% y-o-y increases in shopper traffic and tenant sales.This drove rental reversions of 35% at the mall. 
  • As for rest of portfolio, NPI from 3 main multi-tenanted malls in Beijing remain stable (+0.4% y-o-y).

Slow tenant sales and high occupancy cost an overhang.

  • We think slowing tenant sales will continue to impede management’s ability to extract strong rental reversions given that occupancy costs are already in the low 20%. 
  • We continue to expect single digit full year portfolio rental reversion on back of high occupancy costs and slowing tenant sales. This represents a significant slowdown from the double digit reversions from 2011-2014.

Expect further rising interest costs q-o-q towards 3Q17 as majority of expiring debt gets refinanced.

  • Recall that CapitaMall Xinnan was acquired with 90% debt. That brought debt levels up c.40% from $700.7mn in 2Q16 to current S$989.4mn. A one year S$300mn bridging loan was taken up to finance the acquisition and that debt is due to expire in 3Q17. We expect further rising interest expense q-o-q when this short-term debt gets refinanced towards 3Q17 into longer term debt with more spread out maturity. 
  • We have assumed an average cost of debt of 3% for FY17 versus 2.81% in FY16.

Investment Action

Maintain NEUTRAL with unchanged target price of S$1.44.

  • We maintain our NEUTRAL with an unchanged DDM-derived target price of S$1.44, at an implied FY17e dividend yield of 7.0%. This compares with CRCT’s average yield of 6.6% since 2010 (post GFC). 
  • On the back of slowing fundamentals and rising interest rates posing more headwinds, we deem the higher yield justifiable in current economic climate.

Dehong Tan Phillip Securities | http://www.poems.com.sg/ 2017-04-25
Phillip Securities SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.440 Same 1.440