CapitaLand Mall Trust (CT SP) - DBS Research 2017-07-24: Cap Rate Compression Lifts NAV

CapitaLand Mall Trust (CT SP) - DBS Vickers 2017-07-24: Cap Rate Compression Lifts NAV CAPITALAND MALL TRUST C38U.SI

CapitaLand Mall Trust (CT SP) - Cap Rate Compression Lifts NAV

  • Flat DPU of 2.75 Scts, in line.
  • 2.2% revaluation gain as cap rate compression lifted NAV to S$1.91 from S$1.86.
  • Occupancy edged up but rental reversion continued to be weak.
  • Trimmed DPU by c.0.5%, Target Price unchanged, maintain BUY.

What’s New 

Topline decline led by Funan’s closure; DPU in line. Gross revenue for 2Q17 was S$168.6m, down S$2.3m or 1.3% yo-y.

  • Property operating expenses were S$5.1m, a decrease of S$3.7m or 6.8% y-o-y. The change was mainly due to the closure of Funan from 1 July 2016, stripping out which, gross revenue would have gone up slightly by 0.6% and property operating expenses would have been 2.2% lower for 2Q17, y-o-y, due to lower utilities and maintenance expenses. 
  • Net property income (NPI) was S$117.6m, up 1.2% y-o-y. This figure was not impacted by Funan as the mall had nil NPI contribution in 2Q16. Income available for distribution was S$99.8mm, up 2.8% y-o-y. 
  • DPU was up marginally by 0.4% at 2.75 Scts, after retaining S$2.6m (or 0.07 Scts per unit) for distribution later in FY17 versus S$0.1m retained in 2Q16. Including the retention in both periods, DPU would have gone up by 3.0% y-o-y. 1H17 DPU was 5.48 Scts (excluding retention) and represents 49.8% of our previous FY17 full-year forecast or 50.0% of our revised forecast, in line. 
  • 1H17 retained distribution sums to 0.21 Scts (0.14 Scts from 1Q17 and 0.07 Scts from 2Q17), or 1.9% or our revised FY17 full-year DPU forecast, providing adequate buffer to meet our expectations in the case of a dip in 2H17’s DPU.

Asset revaluation gain 2.2%; NAV up to $1.91. 

  • CMT’s properties registered a handsome revaluation gain of S$218.7m or 2.2% on revaluation date 30 June 2017, compared to six months ago. 
  • The gain was led by Raffles City (up 2.6%), Tampines Mall (up 4.5%), Bugis Junction (up 4.7%), and Junction 8 (up 4.1%). This was led by compression of cap rate of 25-50 bps from valuers after cross-referencing with recent market transactions. The only asset that had a revaluation loss was Westgate (down 9.3%). 
  • As a result, NAV increased from S$1.86 to S$1.91, narrowing P/NAV from 1.08x to 1.05x, based on the last traded price of S$2.02, providing further support to the stock price.

Occupancy edged back up at the expense of rental reversion. 

  • Portfolio occupancy improved from 97.7% to 98.6% q-o-q. Occupancy at Plaza Singapura edged up from 96.2% to 99.8% over the quarter, as the vacancy resulted from the previous anchor tenant John Little was being filled up, primarily by Muji. Other noticeable improvements came from Raffles City, The Atrium@Orchard, and Clarke Quay – all of which except Raffles City had positive rental reversion.
  • On the other hand, 14.1% of the portfolio NLA was renewed in 1H17 with an overall reversion rate of -1.6%. Recalling that 9.2% of the portfolio NLA was renewed in 1Q17 with a reversion rate of -2.3%, we believe the reversion rate for 2Q17 could be flat to marginally negative.
  • The drag mainly came from Raffles City (-1.2%), Westgate (- 10.0%), and Bedok Mall (-7.4%) which all have registered two consecutive quarters of negative rental reversions. 
  • On the bright side, encouraging reversion rates were seen from Bugis Junction (up 2.8%), The Atrium@Orchard (up 5.7%) and Clarke Quay (up 2.8%). We believe the most watched asset is Bedok Mall as more than 50% of the mall’s NLA was renewed in 1H17 at more than 7% lower rents. 
  • In a still challenging retail environment, management is trading off reversion rate in order to maintain sustainable merchants to stabilise DPUs. Both tenants’ sales and shopper traffic were flat y-o-y.

Asset update. 

  • Raffles City: minor AEI is still ongoing, which will impact short-term earnings. 
  • Bukit Panjang Plaza: rejuvenation works including the replacement of the skylight and upgrade of the escalators was complete. 
  • Funan: redevelopment progress is on schedule, with 50% of piling works completed and c.30% occupancy pre-committed. Its show suite was open from 27 April 2017. 
  • Bedok Mall: the first Haidilao (steamboat chain from China) in the eastern region of Singapore will start its operation at the mall from Sep/Oct; we understand the restaurant intends to operate from noon to 2am - this should attract traffic to the mall and even potentially entice some merchants to extend trading hours. 
  • Junction 8: facing competition from Nex (located at Serangoon MRT station), the management is considering an AEI within a year.

Debt refinancing for FY18. 

  • C.S$500m EMTN (or c.15% of gross borrowings) is due to be refinanced in March 2018; both bank loans and notes will be considered. In the case of rising swap rates, the amount will most likely be broken into multiple tranches, with an aim of maintaining the all-in borrowing cost. 
  • Current average cost of debt is still at 3.2%, with average term of maturity of five years. Aggregate leverage is stable at around 35%.

Our View 

Slight trim in DPU, Target Price unchanged at $2.17; Maintain BUY.

  • We have trimmed the DPU by 0.4-0.7% for FY17-19F to reflect weaker-than-expected performance from certain assets, mainly Raffles City, Bedok Mall, and Westgate, while there is no change in the TP. 
  • Forward yield is in the mid-5%, and potential price up side is c.7%.
  • We reiterated our BUY call on 20 June 2017 (See report: CapitaLand Mall Trust - Time to catch up) on the back of CMT’s share price lagging behind both the S-REIT index and Singapore 10Y government bonds this year. We remain positive that there is still room for the stock to catch up with the broad market rally. Maintain BUY.

Singapore Research DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-07-24
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.170 Same 2.170