CapitaLand Retail China Trust - OCBC Investment 2019-06-11: Long-Term Gain, But Short-Term Pain


CapitaLand Retail China Trust - Long-Term Gain, But Short-Term Pain

  • Transaction will strengthen portfolio.
  • But short-term pain ahead.
  • Fair Value drops to S$1.35.

Strategic move to improve portfolio strength

  • CAPITALAND RETAIL CHINA TRUST (SGX:AU8U) has entered to an agreement with a subsidiary and associates of sponsor CAPITALAND LIMITED (SGX:C31) to acquire 100% interests in three companies that hold three multi-tenanted malls in China – CapitaMall Xuefu and CapitaMall Aidemengdun in Harbin and CapitaMall Yuhuating in Changsha.
  • CapitaLand Retail China Trust’s portfolio has previously not had a presence in these two provincial capital cities. The acquisition of the three companies is based on an agreed property value of RMB2,960m (about S$589.2m, implied FY18 NPI yield of 6.0%) for the three malls held by the companies. Including professional fees, CapitaLand Retail China Trust’s total acquisition outlay is estimated to be S$505.4m, subject to post-completion adjustments.
  • The malls will increase CapitaLand Retail China Trust's portfolio GFA by 30.7% and currently enjoy an average occupancy of 99.0%.
  • We believe the transaction will strengthen CapitaLand Retail China Trust’s portfolio by expanding its geographical reach to two more provincial capital cities, improving tenant diversification and increasing its portfolio size which can in turn lower financing costs. The financing plan, however, remains a concern in the short term.

However, financing may cause near-term pain

  • CapitaLand Retail China Trust intends to finance the proposed acquisition via a combination of debt and equity and has stated that its objective is to achieve accretion. The financing plan details will be decided at a later date.
  • The transaction is conditional upon unitholders’ approval at an EGM and is expected to be completed in 3Q19.
  • As at 31 Mar 2019, CapitaLand Retail China Trust’s gearing was 35.5%. Assuming CapitaLand Retail China Trust geared up to 40.0%, this would translate into a debt headroom of S$136.5m. Taking into account the debt held by the three holding companies that needs to be repayed by CapitaLand Retail China Trust, CapitaLand Retail China Trust effectively has S$52.7m of debt headroom (to a 40.0% gearing limit) to use for the outlay. To raise the remainder of S$452.7m needed for the transaction, a rights issue – as opposed to a private placement – may be required.
  • If we then assume a 2.9% cost of debt and a 15% discount to today’s morning session close for the rights price, this would translate to a FY18 DPU dilution of 8% to 12%. The range depends on how much leakage we project from the NPI: 20% leakage to 35% leakage.
  • We believe that it will be difficult for the transaction to be “DPU accretive” unless CapitaLand Retail China Trust’s consensus dividend yield compresses significantly on the back of further unit price rally. The transaction may, however, be “DPU yield accretive” against the theoretical ex-rights price (TERP) in the event of a rights issue.
  • An upside risk to our thesis is the divestment of one of CapitaLand Retail China Trust’s assets to help fund this acquisition.
  • In anticipation of a potential equity fundraising, our fair value drops 10% from S$1.50 to S$1.35. We downgrade CapitaLand Retail China Trust from Hold to SELL.

Deborah Ong OCBC Investment Research | https://www.iocbc.com/ 2019-06-11
SGX Stock Analyst Report SELL DOWNGRADE HOLD 1.35 DOWN 1.500