CapitaLand Mall Trust - DBS Research 2017-06-20: Time To Catch Up

CapitaLand Mall Trust - DBS Vickers 2017-06-20: Time To Catch Up CAPITALAND MALL TRUST C38U.SI

CapitaLand Mall Trust - Time To Catch Up

  • Tactical position into CMT as valuations are close to its 5-year –1 standard deviation levels.
  • Relevant competition from new supply to CMT is significantly smaller than investors’ perception.
  • Upside to NAV in upcoming results could be a rerating catalyst.

Attractive valuation. BUY, Target Price S$2.17. 

  • CapitaLand Mall Trust (CMT)’s share price has been flat this year, which has lagging behind both S-REIT index (up 13.9% YTD) and Singapore 10Y government bonds which is down by 30bps to 2.08% since the start of the year. 
  • We believe the underperformance is due to investors’ concerns on potential downside earnings risk given the weak operating outlook but we believe these risks are priced in at current levels. 
  • Yields spread of close to 3.7% against the 10-year government bond is at its five-year -1 standard deviation (S.D.) level, implying that the yield spread will converge to its long-term mean of 3.3%. BUY! 

Where we differ: We remain positive despite a divided street.

  • While the street remains divided on the stock given the uncertainties of the impact from surging new retail supply over 2017-2019, we believe the new supply may not be as threatening to CMT. 
  • According to our analysis, we estimate that only less than 50% of the incoming new supply are relevant competition to CMT’s properties. The major new supply is concentrated in 2018 and will likely have different target shoppers than CMT’s portfolio, e.g. Paya Lebar Quarter (office crowd) vs Bedok Mall (night/weekend family), and Changi Jewel (tourist and destination) vs Tampines Mall (neighbourhood) which means that performance should remain stable. 
  • Our DPU estimates are conservative and we believe that the new CEO could bring in fresh blood from expertise in managing retail malls in China, a more dynamic market.

Surging supply may not be as threatening as you think

Channel check: clear objective on optimising returns: 

  • We recently met up with CMT’s new CEO, Mr Tony Tan, who was previously the CEO of CapitaLand Retail China Trust (CRCT) from July 2010 to March 2017. 
  • We remain optimistic on the renewed focus Mr Tan has put in place. Mr Tan has expressed clear objectives to maintain the REIT’s DPU in the next couple of years despite headwinds in the retail market. We believe this is achievable due to the sticky patronage of CMT’s malls and forward thinking of concepts from his experience in managing retail malls in China, which is a more dynamic and diverse market.

Surging supply may not be as threatening: 

  • Despite more than 440,000 sqm of new retail space coming in the next few years, we believe the relevant competition, from relative size and location perspectives, to CMT is only around 210,000 sqm or less than 50%.

Relevant supply in 2017: Singapore Post Centre and Triple One Somerset. 

  • For the year 2017, Singapore Post Centre is an alteration of an existing project and hence it should not capture new market share beyond its own catchment, which does not overlap with Bedok Mall; The price point of TripleOne Somerset is likely to be quite different from Plaza Sing or The Atrium @ Orchard.

Relevant supply in 2018: Paya Lebar Quarter and Bedok Mall.

  • The key supply is concentrated in 2018 from three building - the retail component of Paya Lebar Quarter, an integrated project, is understood to target the office crowd, whereas Bedok Mall should continue to differentiate its brand mix and position itself as a family-oriented shopping centre.
  • Meanwhile, Changi Jewel will be located at the airport which is inconvenient for existing shoppers at Tampines Mall to access. Moreover, given its mega size of 90,000 sqm, Changi Jewel will be a designation mall designed to attract transit travelers. 

Relevant supply in 2019: Northpoint City. 

  • Lastly in 2019, the only asset in CMT’s portfolio located in the north region, where Northpoint City is being built, is Sembawang Shopping Centre but its too small to move CMT’s bottom line.

Potential Catalyst: Upside from valuations in the upcoming results. 

  • Recent transaction of Jurong Point at 4.2% cap rate is a significant milestone in Singapore and we believe this to have a positive impact on CMT’s portfolio valuations in the upcoming results. 
  • On a P/NAV basis, CMT is already trading at –1 S.D. level and the discounts to NAV could widen once portfolio revaluations are updated. Acquisitions, if any, could present as earnings surprise for the stock.


  • Maintain Target Price at S$2.17. 
  • The stock offers FY17F DPU yield of over 5.5% and total potential return in excess of 13%.

Key Risks to Our View

  • More aggressive rate hikes than consensus’ expectations may cause ripples in the market. CMT being a proxy for interest-rate investment, may then suffer from selling pressure.

Singapore Research DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-06-20
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.170 Same 2.170