CapitaLand Mall Trust - RHB Invest 2018-01-25: Navigating Through Challenges

CapitaLand Mall Trust - RHB Invest 2018-01-25: Navigating Through Challenges CAPITALAND MALL TRUST C38U.SI

CapitaLand Mall Trust - Navigating Through Challenges

  • Overall, the retail environment continues to remain challenging amidst changing consumer trends and high incoming retail supply. While CapitaLand Mall Trust (CMT) has proactively taken steps to mitigate these threats, we expect weakness on its rental growth to persist. 
  • The key game changer ahead is the successful transformation of Funan Mall, which is positioned as the mall of the future. 
  • CapitaLand Mall Trust’s valuation seems fair, with a FY18F yield of 5.4% and P/BV of 1.1x. We maintain our NEUTRAL recommendation, and nudge up our Target Price to SGD2.10 (from SGD2.08, 1% upside).

Retail rental rates to remain stagnated. 

  • CapitaLand Mall Trust (CMT) posted rental reversion of -1.7% for FY17, vs +1% last year. Notably, the negative rental reversion for 4Q17 was spread across six of its malls, compared to five in 9M17. This indicates that market conditions across the island are challenging.
  • While retail sales data in the recent months point to a slight uptick in demand, we expect the high incoming supply of retail space to keep pressuring rental rates. Overall, about 28% of its leases are up for renewal in 2018, for which we expect slightly negative rental reversions (-1% to -2%). On a positive note, CMT increased its mall occupancy rate to 99.2%, the highest in the last seven years.

Supply pressures remain. 

  • Based on CBRE data, about 2.5m sqf (5% of inventory) of retail space supply is expected to come on-stream over the next three years. This translates to ~0.83m sqf pa of supply, higher than the 10-year average net demand of ~0.68m sqf. 
  • Nearly three quarters of the retail supply is in the fringe and suburban areas – which poses more direct competition to some of CMT’s suburban malls.

Funan Mall – the potential re-rating catalyst. 

  • Construction works at Funan Mall are progressing well, and management thinks there is a possibility of opening ahead of schedule in 3Q19 (target: 4Q19). About 40% of the retail space has been committed, and management expects to secure leases for 70% of the mall by the end of this year. 
  • With additional funds from the recent divestment of its serviced residences component, management expects to better its initial yield-on-cost target of 6.5%. 
  • We also see the possibility of the divestment of its office component in the near term – which could further enhance the yields.

Other asset enhancement initiatives (AEI). 

  • Rejuvenation works at Bukit Panjang Plaza are now completed, to enable it to better tackle the growing competition from the newly-opened Hillion Mall. 
  • Raffles City’s (40% stake) AEI is expected to be completed by 1Q18. 
  • Other assets that have been identified for AEIs include Lot One Shoppers’ Mall and Westgate.

Maintain NEUTRAL, with a Target Price of SGD2.10. 

  • We lift our FY18F-19F estimates by 1-2%, by factoring in utility cost savings. Our DDM-derived Target Price is based on CoE of 7%, and a terminal growth rate of -1.5%. 
  • Key re-rating catalysts are a better-than-expected pick-up in retail consumption demand, the successful transformation of Funan Mall, and yield-accretive asset acquisitions

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2018-01-25
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 2.10 Up 2.080