CapitaLand Mall Trust - RHB Invest 2018-04-23: Some Positives, But Outlook Remains Soft

CapitaLand Mall Trust - RHB Invest 2018-04-23: Some Positives, But Outlook Remains Soft CAPITALAND MALL TRUST C38U.SI

CapitaLand Mall Trust - Some Positives, But Outlook Remains Soft

  • CapitaLand Mall Trust (CMT)’s rental reversion for the quarter turned slightly positive (+0.8%) after a challenging 2017. However, shopper traffic and tenant sales across its malls remained weak, indicating cautious consumer spending.
  • While the retail sales index has shown a pick-up in recent months, we note that ground sentiment among retailers and landlords remains cautious amidst higher retail supply and a volatile macroeconomic environment.
  • The recent divestment of Sembawang Shopping Centre is positive, as it helps CMT unlock capital from a mature asset.
  • Key re-rating catalysts ahead are the transformation of Funan and successful revamp of its key assets.
  • Overall, CMT’s current valuation of 1.1x P/BV and yield of 5.4% for FY18F is fair, in our view. Maintain NEUTRAL, with a SGD2.10 Target Price (0% upside).

1Q18 DPU up 1.8%YoY.

  • CapitaLand Mall Trust’s (CMT) revenue rose 1.8% y-o-y, while NPI rose higher by 4.7% y-o-y on the back of lower utilities and marketing cost. 
  • Finance cost decreased by 5% y-o-y due to lower interest costs post refinancing. Its portfolio occupancy rate was 98.9% (-0.3ppt q-o-q, +1.2ppt y-o-y). 
  • The results are in line with DPU accounting for 25% of our full year forecast.

Divesting SSC at a good price.

  • CMT announced on 19 Apr, the divestment of its Sembawang Shopping Centre (SSC) to a JV comprising Lian Beng Group and Apricot Capital Pte Ltd for SGD 248m, 97% higher than its latest Dec 2017 valuation. 
  • The divestment, at exit NPI yields of 4.2%, would result in CMT reaping a net gain of SGD119.6m. The overall impact to our DPU is however marginal ~1%, as the asset is relatively small. Assuming the entire proceeds are used to repay its debt, gearing is expected to drop to 31.1% from 33.5%, offering healthy debt headroom ( > SGD1bn) for acquisitions. 
  • The transaction is expected to be completed by June.

Slight uptick in rental reversion.

  • Rental reversion for 1Q18 came in slightly positive, at +0.8%, after declining 1.7% last year. 
  • The positive reversion was mainly driven by Plaza Singapura, Lot One Shoppers mall, Junction 8 and Tampines mall. However, shopper traffic and tenant sales for the quarter declined by 2.1% y-o-y and 0.2% y-o-y respectively. 
  • Overall, about 20% of its leases (as % of gross rental income) are due for renewal in 2018, for which we expect flat to slightly negative rent reversions.

Supply pressures remain.

  • Based on CBRE data, c.2.5m sqf (5% of inventory) of retail supply is expected to come on-stream over 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 fringe and suburban areas, posing more direct competition to some of CMT’s suburban malls. 
  • While recent months’ retail sales data points to a slight uptick in demand, we note that the ground sentiment among retailers and retail landlords remains cautious, amidst high incoming supply and a volatile global macroeconomic environment.

Funan – a potential re-rating catalyst.

  • Construction work in Funan is progressing well and management sees a possibility of opening ahead of schedule in 3Q19 (target 4Q19). More than 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. 
  • Overall, management expects to better its initial yield-on-cost target of 6.5% for the asset. We also see the possibility of office components being divested in near-term, which could further boost yields.

Maintain NEUTRAL, with a SGD2.10 Target Price.

  • Our DDM-derived Target Price is based on a CoE of 6.9% and terminal growth of 1.5%. 
  • Key re-rating catalysts are the continued pick-up in retail consumption demand, the successful transformation of Funan and yield-accretive acquisitions.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2018-04-23
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