CapitaLand Mall Trust - Maybank Kim Eng 2018-04-23: Stabilising Rents, Weak Growth Outlook

CAPITALAND MALL TRUST C38U.SI

CapitaLand Mall Trust - Stabilising Rents, Weak Growth Outlook

We fine-tuned our estimates for CapitaLand Mall Trust (CMT) following its 1Q 2018 results, with the reported +0.8% portfolio rental reversion and overall performance in line with our expectation. With Singapore’s retail sector at its early stages of e-commerce disruption, we continue to see a weak growth outlook for CMT and its mall properties.
Against recovering macro fundamentals, we see an earlier improvement in prime Orchard Road rents, possibly benefiting SPH REIT (Rating: HOLD, Target Price SGD1.00). We prefer Frasers Centrepoint Trust (Rating: BUY, Target Price SGD2.55) for its dominant suburban mall footprint and visible 4.2% DPU CAGR profile.

Our new DDM-based Target Price is slightly lowered (2%) to SGD2.15 (WACC: 7.1%, LTG: 1.5%). HOLD.

CapitaLand Mall Trust (CMT)’s 1Q18 revenues were up 1.8% y-o-y, while NPI rose 4.7% on higher occupancies at IMM Building, Clarke Quay, The Atrium@Orchard and Plaza Singapura. Rental reversion at +0.8% was in line with our expectation, with the majority of its malls witnessing a moderation in the weaker or negative reversions in earlier quarters (-1.7% in 4Q17).
Tenant sales (measured on psfpm), however, fell 0.2% y-o-y against a 2.1% y-o-y decline in shopper traffic. This is likely to cap any upside in renewals to low single-digits, in spite of a more optimistic consumer backdrop.
CMT’s large portfolio continues to remain well-balanced with 20.0% and 31.1% of leases expiring in FY18 and FY19, respectively. We see the potential for positive reversions at IMM (26.4% of leases by NLA in FY18) for its busy outlet stores, which, as a sub-segment, should outpace overall retail sector growth.

CapitaLand Mall Trust (CMT) had earlier announced it would divest Sembawang Shopping Centre (SSC) to a JV between Lian Beng Group (LBG SP, SGD0.63, Not-rated) and Apricot Capital Pte Ltd for SGD248.0m. The sale of SSC, its smallest asset at 143,600 sf NLA and at 99% occupancy, is expected to be completed around 18 Jun, resulting in a SGD119.6m net gain (after transaction costs), based on the SGD126.0m end-Dec 2017 valuation.
While NPI contribution is expected to fall 2% once the sale is closed, the proceeds will enhance financial flexibility, possibly through distributions in coming quarters.

Earlier-than-expected pick-up in leasing demand for retail space driving improvement in occupancy.
Better-than-anticipated rental reversions.
Accretive acquisitions or redevelopment projects.

Prolonged slowdown in economic activity could reduce demand for retail space, resulting in lower occupancy and rental rates.
Termination of long-term leases contributing to weaker portfolio tenant retention rate.
Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations

Chua Su Tye Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-04-23

SGX Stock Analyst Report BUY Maintain HOLD 2.15 Down 2.200