REIT - CGS-CIMB Research 2020-01-22: Big Getting Bigger

CAPITALAND MALL TRUST (SGX:C38U) CAPITALAND COMMERCIAL TRUST (SGX:C61U)

REIT - Big Getting Bigger

Proposed merger of CapitaLand Mall Trust (SGX:C38U) and CapitaLand Commercial Trust (SGX:C61U) to form largest SREIT in Singapore. CapitaLand Commercial Trust unitholders to receive 0.72 new CapitaLand Mall Trust units and S$0.259 cash per CapitaLand Commercial Trust unit.

Benefits of the deal include increased size to undertake development opportunities, higher debt headroom, and a more diversified portfolio.
Maintain HOLD rating on CapitaLand Mall Trust with an unchanged Target Price of S$2.64 and ADD rating on CapitaLand Commercial Trust with an unchanged Target Price of S$2.25.

CapitaLand Mall Trust and CapitaLand Commercial Trust have proposed to merge via a scheme consideration. Post-merger, the combined entity will be the largest SREIT in Singapore and the third largest in Asia Pacific, with an estimated market cap of c.S$16.8bn (as at 21 Jan 2020); CapitaLand Commercial Trust will be held as a sub-trust of CapitaLand Mall Trust. The combined entity will be renamed Capitaland Integrated Commercial Trust.
The enlarged portfolio will comprise 24 properties valued at S$22.9bn split between Singapore (96%) and Germany (4%). Breakdown by asset class would be: retail (33%), office (38%) and integrated developments (29%).
Based on the company’s announcement, CapitaLand Mall Trust will acquire all issued and paid-up units of CapitaLand Commercial Trust. The consideration of S$2.1238/CapitaLand Commercial Trust unit assumes new units at CapitaLand Mall Trust are issued at S$2.59/ consideration unit.
CapitaLand Commercial Trust unitholders will receive 0.72 new CapitaLand Mall Trust units and S$0.259 of cash per CapitaLand Commercial Trust unit, implying a gross exchange ratio of 0.82x. The deal is subject to both sets of unitholders’ approval and the scheduled completion date is by Jun 2020F.

The enlarged entity is likely to be better positioned to explore growth opportunities with a broader investment focus, including retail, office and integrated projects as well as overseas acquisitions. Properties acquired under the combined entity will be subject to CapitaLand Mall Trust’s fee structure.
In addition, with enlarged assets under management (AUM) of S$24bn, the merged entity could undertake additional developments of up to S$6bn and increase its debt headroom to c.S$2.9bn. We think this will enhance the REIT’s ability and flexibility to undertake larger redevelopments.
Aside from the improved growth outlook, we believe the larger entity would be more resilient with a more diversified portfolio to hedge against market cycles and reduced asset concentration risk.

Based on its announcement, CapitaLand Mall Trust is expected to issue a total of 2,829.7m new units (including acquisition fees in units) and take on S$1,021.1m of new debt to fund the transaction.
Based on pro-forma numbers, the deal could result in a 1.6% and 1.5% increase in FY19 pro-forma DPU and NAV, respectively. It expects post-merger gearing of the combined entity to move higher towards the 38% mark.
For CapitaLand Commercial Trust, management guided that the deal is expected to result in a pro-forma 6.5% accretion to FY19 DPU.

Aside from the projected near-term DPU accretion for CapitaLand Mall Trust and CapitaLand Commercial Trust, we think the benefits of the deal could be felt in the longer run, when the enlarged entity delivers on accelerated growth prospects.
We maintain our ratings and DDM-based Target Price for CapitaLand Mall Trust (HOLD, Target Price: S$2.64) and CapitaLand Commercial Trust (ADD, Target price: S$2.25).
See Capitaland Mall Trust Share Price; Capitaland Mall Trust Target Price; Capitaland Mall Trust Analyst Reports; Capitaland Mall Trust Dividend History; Capitaland Mall Trust Announcements; Capitaland Mall Trust Latest News.
See also Capitaland Commercial Trust Share Price; Capitaland Commercial Trust Target Price; Capitaland Commercial Trust Analyst Reports; Capitaland Commercial Trust Dividend History; Capitaland Commercial Trust Announcements; Capitaland Commercial Trust Latest News.
Re-rating catalysts could come from more details on redevelopment or overseas acquisition opportunities.
Key sector upside risk include a continued benign interest rate environment while downside risk is slower than expected macroeconomic conditions.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-01-22

SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.640 SAME 2.640

ADD MAINTAIN ADD 2.250 SAME 2.250