CapitaLand Mall Trust - RHB Invest 2017-07-24: A Decent Quarter But Challenges Remain

CapitaLand Mall Trust - RHB Invest 2017-07-24: A Decent Quarter But Challenges Remain CAPITALAND MALL TRUST C38U.SI

CapitaLand Mall Trust - A Decent Quarter But Challenges Remain

  • CapitaLand Mall Trust (CMT)’s 2Q results are in line. 
  • In 2Q17, key positives were a slight uptick in shopper traffic and tenant sales. Rental reversion stood flattish, vs 1Q17’s 2.3% YoY dip. While the performance of its well-positioned suburban malls stayed stable, other mall assets like Westgate and Bedok Mall recorded weaker numbers. 
  • Looking ahead, we expect rental growth to be muted, as retail supply remains high amid changing consumer demand. Thus, CMT’s current valuation of 1.1x P/BV and yield of 5.5% for FY17F is fair, in our view. 
  • NEUTRAL, with a SGD2.08 Target Price (from SGD2.07, 2% upside).

Rental growth to remain stagnant. 

  • Singapore’s retail environment showed signs of improvement in 2Q17. 
  • CapitaLand Mall Trust’s (CMT) rental reversion stayed flattish, vs the 2.3% YoY decline in 1Q17 (1H17: -1.6% YoY). More importantly, its shopper traffic and tenant sales rose slightly after declining in 1Q17. About 8%/30% of leases (as a percentage of gross rental income) are due for renewal in 2H17/FY18 respectively. 
  • We expect the rental growth to remain muted (ie flattish to slight growth) as Singapore’s retail sector undergoes a structural transformation amidst challenging macro-economic conditions.

Supply challenges remain. 

  • CBRE expects c.3.1m sqf (6.4% of inventory) or c.1m sqf pa of retail supply to come on-stream over the next three years, vs the 10-year average net demand growth of 676,000 sqf. The retail sales index (excluding motor vehicles) rose 0.6% YoY in May, showing some signs of stabilisation. 
  • Amid these challenges, the location and positioning of malls would be crucial in delivering growth and we expect well-located suburban malls with a good population catchment to still outperform the industry average.

Funan DigitaLife Mall (Funan Mall) has 30% of leases pre-committed.

  • c.30% of its retail NLA (324,000 sqf) has been pre-committed well ahead of its expected re-opening in 4Q19. We understand rental rates are SGD10-15 psf. 
  • The healthy pre-commitment level augurs well for CMT to be selective about future tenants, and would aid in better curation of the mall. Key major committed tenants include Golden Village, W!ld Rice, Fairprice Finest and Newstead. 
  • CMT said it is on track to achieve its yield target of 6.5% for the redevelopment of Funan Mall.

Timely asset enhancement initiative (AEI) to fend off competition. 

  • AEI works on Bukit Panjang Plaza, which include replacing the skylight and upgrading escalators, is complete. We believe the AEI is timely, in light of the increasing competition from the newly-opened Hillion Mall in the vicinity, and should help improve shopper traffic. 
  • Raffles City’s (CMT has a 40% stake) AEI is progressing well, and is expected to be completed by 1Q18.

Fairly valued; maintain NEUTRAL with a Target Price of SGD2.08. 

  • We maintain our earnings estimates but fine-tune our DDM model by trimming our CoE assumption to 6.9%, from 7.1%. 
  • We also cut our TG assumption to 1.5%. 
  • CMT offers a FY17F yield of 5.5% and trades at 1.1x FY17F P/BV, which we deem as fair. 
  • Key re-rating catalysts are a pick-up in retail consumption demand, the successful transformation of Funan Mall and accretive asset acquisitions.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-07-24
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 2.080 Up 2.070