CapitaLand Mall Trust - DBS Research 2018-01-29: Remain Positive On A Divided Street

CapitaLand Mall Trust - DBS Vickers 2018-01-29: Remain Positive On A Divided Street CAPITALAND MALL TRUST C38U.SI

CapitaLand Mall Trust - Remain Positive On A Divided Street

  • CapitaLand Mall Trust (CMT)'s Top-line up in 4Q17 but slightly down for FY17.
  • FY17 DPU of 11.16 Scts is flat y-o-y and 2% higher than our forecast.
  • Portfolio property valuations saw an average 50-bp cap rate compression, lifting NAV up by 3%.
  • FY17 full-year reversion was -1.7%, while occupancy stays intact at 99%.

BUY with Target Price of S$2.19. 

  • CapitaLand Mall Trust’s (CMT) share price has been lagging the rise in the S-REIT index. We believe the underperformance is due to investors’ concerns on the potential earnings downside risk given the weak operating outlook, but we believe these risks are priced in at current levels. 
  • We reiterate our BUY call.

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

  • While the street remains divided on the stock given the uncertainties over the impact of the surge in new retail supply over 2017-2019, we believe the new supply may not be as threatening to CapitaLand Mall Trust. 
  • According to our analysis, only less than 50% of the incoming new supply is relevant competition to CapitaLand Mall Trust’s properties. The major new supply is concentrated in 2018 and will likely have different target shoppers than CapitaLand Mall Trust’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.

Potential catalyst: Better-than-expected reversions. 

  • Expectations for CapitaLand Mall Trust are low, with most investors not anticipating any rental reversion growth, in our view. The recent uptick in retail sales, if sustained, could mean that downside to rental reversions is likely to be minimal and result in a share price re-rating.


  • Maintain Target Price at S$2.19. The stock offers an FY18F DPU yield of 5.5% and total potential return in excess of 10%.

Key Risks to Our View

  • More aggressive rate hikes than consensus’ expectations may cause ripples in the market. Being a proxy for interest-rate investment, CapitaLand Mall Trust may then suffer from selling pressures.

WHAT’S NEW - 4Q/17 results largely flat; revaluation gain due to cap rate compression lifting NAV by 3%

Top-line performance up in 4Q17 but slightly down for FY17. 

  • Gross revenue for 4Q17 was S$172.4m, up 1.8% or S$3.1m y-o-y. The increase was mainly due to higher occupancy for Bugis Junction and The Atrium@Orchard as well as higher car park income, though partially offset by lower rental income and lower occupancy from Bedok Mall. 
  • Property operating expenses were S$53.1m, a marginal decrease from 4Q16. Net property income (NPI) for 4Q17 was S$119.3m, up 2.6% y-o-y. 
  • Gross revenue for FY17 was S$682.4m, down 1.1% or S$7.3m y-o-y. The decrease was mainly due to Funan as the mall ceased its operations for redevelopment from July 2016, as well as lower rental income and lower occupancy achieved at Bedok Mall which more than offset the improvement in rental from IMM, JCube, and Clarke Quay. 
  • NPI for FY17 was S$119.3m, slightly down by 0.3% y-o-y. 
  • Full-year DPU for FY17 summed to 11.16 Scts, marginally up from FY16’s 11.13 Scts, representing 101.8% of our forecast, slightly exceeding our expectations.

Occupancy inched up over the quarter and y-o-y. 

  • Portfolio occupancy rate inched up over the quarter from 99.0% to 99.2%, and from 98.5% a year ago. The major improvement
  • in occupancy over the year came from IMM (from 97.9% to 99.5%) and Clark Quay (from 90.7% to 98.8%). The investment put into revamping these two assets in FY16 has borne fruit.

Rental reversion for FY17 was -1.7%. 

  • CapitaLand Mall Trust has been adopting the strategy to trade off rental growth for occupancy rate in order to bring a sustainable cash flow. As such, we saw 21.0% of the portfolio NLA being renewed in FY17 with an average reversion rate of -1.7%. 
  • The main drags in negative rental reversion came from Tampines Mall (- 3.2%), Westgate (-10.2%) and Bedok Mall (-6.5%), although notable improvements have been seen from Junction 8 (+2.6%), IMM (+1.1%), and Bugis Junction (1.7%).

Lower occupancy cost. 

  • While tenants’ sales remain steady y-o-y, with lower rental, average occupancy cost for the portfolio decreased from 19.0% to 18.7% over the year.
  • Shopper traffic declined slightly by 0.3% y-o-y.

Revaluation gain due to cap rate compression. 

  • Generally speaking, cap rates compressed by 50bps from the independent valuations. This pushed NAV up by 3.2% from S$1.86 to S$1.92. 
  • At the stock’s current price of S$2.05, the P/NAV has compressed from 1.10x to 1.07x as a result.


Focus on a few spotlights. 

  • We believe the performance of four properties need to be held steady for CapitaLand Mall Trust to deliver stable DPU next year. They are Plaza Singapura, Tampines Mall, Raffles City and Bedok Mall, together contributing close to 30% of CapitaLand Mall Trust’s net income from all investments (including associates and joint ventures, i.e. Raffles City, Westgate and CRCT). These four properties have kept their almost full occupancy at the expense of soft or negative rental reversions this year. IMM continued to be strong but is insufficient to cushion the income pressure. 
  • Disappointing performance may continue from Bukit Panjang Plaza and Westgate. However, investors should not pay undue attention to these two properties as they only contribute 2.4% and 2.0% respectively to CapitaLand Mall Trust’s net income.

Impact of the opening of Downtown Line 3 will be monitored. 

  • The opening of extension of the downline MRT line may also disrupt Singapore shoppers’ behaviour. For instance, the new station at Fort Canning may bring more traffic to Clark Quay, whereas the other new station connecting Tampines to Expo could divert traffic from Tampines Mall. 
  • The actual impact needs to be monitored. At this stage, we do not expect the new line to materially change the performance of the two malls.

Cap rate compression enhances financing flexibility but may toughen acquisition hurdles. 

  • We have observed broad market cap rate compression applied by independent valuers in the retail mall space. 
  • While an increase in asset value lowers gearing which enhances a REIT’s ability to finance AEIs or acquisitions, cap rate compression is a double-edged sword. This is because it also pulls up the valuation of potential acquisition targets, implying a tighter yield at acquisition, thus making the acquisition less likely to be yield accretive to a REIT. 
  • The Management of CapitaLand Mall Trust has expressed interest to acquire assets in Singapore or overseas, mainly Australia, but has no feasible pipeline at the moment.

Maintain BUY with unchanged Target Price at S$2.19. 

  • Total potential return is around 10.5% inclusive of 5.2% forward yield.

Singapore Research Team DBS Vickers | Derek TAN DBS Vickers | 2018-01-29
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.190 Same 2.190