CapitaLand Mall Trust - DBS Research 2019-04-25: Marvelous Growth


CapitaLand Mall Trust - Marvelous Growth

  • CapitaLand Mall Trust's 1Q19 DPU came in within expectations.
  • Optimism in operational numbers despite management’s cautious tone.
  • Funan mall to drive earnings from 2H19 onwards.
  • Upside from a low gearing.

Staying above the competition.

  • We remain convinced that attention will turn to CAPITALAND MALL TRUST (SGX:C38U) as one of the faster growing large-cap S-REITs with a CAGR of 3.0% over FY18-20F. As the retail sector bottoms out and new contributions from Funan and Westgate flow in, we believe that investors will accord higher valuations on CapitaLand Mall Trust.
  • Our Target Price is raised to S$2.55 after we roll forward valuations. Maintain BUY!

Where We Differ:

  • Deep dive into micro-markets gives us confidence that CapitaLand Mall Trust can surprise on the upside. While the street remains divided on the stock given the uncertainties over the impact of the surge in new retail supply in 2019, especially Jewel in 2Q19.
  • While we expect some volatility in the east-side malls, we believe that higher contributions from Westgate and Funan will more than compensate for the expected near-term hurdles that Tampines Mall and Bedok Mall, located in the East, may face now but should normalise in the medium term.

Potential catalyst:

  • Improving rental reversions or acquisitions. We believe CapitaLand Mall Trust delivered operationally and the past tenant remixing efforts are bearing fruit as portfolio rental reversions came in +1.2%, which is an improvement across most of its malls.
  • The utilisation of its balance sheet to fund further acquisitions also offers an upside surprise to our estimates.


  • Reiterate BUY; Target Price adjusted to S$2.55.
  • At current CapitaLand Mall Trust share price, the stock offers FY19F DPU yield of 5.0% 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 pressure.

WHAT’S NEW - Positive start in 1Q19

1Q19 DPU of 2.88 Scts in line with expectation

  • CapitaLand Mall Trust delivered a positive start to 2019, with a 3.6% y-o-y growth in DPU to 2.88 Scts, coming in within 25% of our full-year forecast. Revenues and net property income grew by 10.0% and 11.5% y-o-y to S$192.7m and S$140.1m respectively.
  • Amount available for distribution to unitholders rose 11.3% y-o-y to S$121.4m. After accounting for income retained of S$15.1m, income to be distributed amounted to S$106.3m. The income retained comprises S$9.2m of taxable income which will be likely be paid out in the subsequent quarters and S$5.9m from CAPITALAND RETAIL CHINA TRUST (SGX:AU8U) which will be kept for general working capital purposes.
  • The growth in distributions was driven by a combination of steady portfolio operational performance (steady occupancy rates and positive rental reversion of 1.2% in 1Q19) coupled with the purchase of 70% stake in Westgate Mall in 4Q18. This more than compensates for the income vacuum for Sembawang Shopping Centre which was divested in June 2018.

Gearing levels stable at 34.4% with financial metrics remaining strong

  • Following the Westgate acquisition, which was 65% debt-funded, gearing rose sequentially from 31.7% (3Q) to 34.2% (4Q) and remained stable at current levels. While average cost of debt was stable at c.3.2%, the average term to maturity was 4.2 years.
  • Post quarter end, the manager has also taken advantage of the flattish yield curve to further term out its weighted average debt expiry further with the issuance of 10-year US$300m fixed rate notes at S$3.609%. The longer duration debt is positive for CapitaLand Mall Trust as it minimises interest rate volatility for the longer term.

Sense of optimism in the operational numbers despite management’s cautious tone

  • Across CapitaLand Mall Trust’s portfolio, the NPI uplift was relatively broad-based with positive rental reversion of 1.2% on 336,000 sqft of leases renewed in the quarter. We note that most of the malls in the portfolio (ex Raffles City) turned positive in a range of 0.1-4.2%. Raffles City saw negative rental reversions largely due negative renewal of a fashion tenant.
  • Occupancy rate dipped slight from 99.2% to 98.8% but is likely to be more transitional in nature.
  • We remain excited on the improved stability and basing out of rental reversions, which is tad better than the +0.7% reported in FY18. We believe that this is a positive signal that things are improving and that pressures in the retail space are bottoming out
  • Tenant sales on a psf basis dipped 0.4% y-o-y on the back of 2.0% increase in traffic. Management believes this does not represent a trend and could be due to the early Lunar New Year holidays in 2019 which might have resulted in some “consumer fatique”.
  • While tenant sales by trade categories was generally negative in 1Q19, we note that categories in which CapitaLand Mall Trust has more exposure (c.60% of revenues) are growing – Sporting Goods, Jewellery, F&B and Fashion, reported higher sales y-o-y.
  • In terms of competition from recently opened Jewel, the manager is seeing some impact in terms of shopper traffic over first opening weekend of Jewel but cautions that there could be further volatility in the near term. However, they expect normalcy to return in the medium term after the novelty effect wears off.

Funan is tracking in line with estimates

  • The mall is expected to open towards the end of 2Q19 and is now close to 90% leased with the office portion achieving commitment rates in excess of 92%+ while retail is slightly behind at c.87%+. As it approaches the soft opening date, the manager is mindful about the curation of the tenant mix and will be selective in the names that they introduce to the mall.

Raising Target Price to S$2.55.

  • We roll forward our valuations which resulted in a higher Target Price of S$2.55.
  • We continue to like CapitaLand Mall Trust for its defensive portfolio and with the retail sector’s recovery underway, we expect valuations to remain buoyant in the medium term. Maintain BUY.

Carmen TAY DBS Group Research | Derek TAN DBS Research | 2019-04-25
SGX Stock Analyst Report BUY MAINTAIN BUY 2.55 UP 2.440