CapitaLand Mall Trust - CGS-CIMB Research 2020-03-04: It’s Time!

CAPITALAND MALL TRUST (SGX:C38U)

CapitaLand Mall Trust - It’s Time!

Ground check found suburban malls resilient in shopper traffic and retail spending. ION Orchard tenants still seeing soft sales, but some improving.
The market has unduly priced in 11% DPU decline in FY20F; we believe the impact will be less. Upgrade to ADD with a higher DDM-based Target Price of S$2.75.

Recent CapitaLand Mall Trust share price weakness provides buying opportunity to gain exposure to the largest REIT in Singapore (post merger with CapitaLand Commercial Trust (SGX:C61U)).

We ran a ground check at a few of CapitaLand Mall Trust’s malls as well as ION Orchard on a weekday from 11am to 6.30pm. We found CapitaLand Mall Trust's suburban malls relatively resilient in shopper traffic and retail spending.
Bishan Junction 8 tenants said they were generally sheltered from the Covid-19 impact. More tenants in Tampines Malls, Raffles City, Plaza Sing and Funan have been seeing improvement in sales in the past 1 week. However, tenants at ION Orchard are in general still seeing a lack of tourist shoppers.

During the SARS outbreak in 2003, CapitaLand Mall Trust (SGX:C38U)’s revenue (excluding the acquisition of IMM) declined 2.9% q-o-q in 2Q13, but quickly resumed growth in 3Q with +9.2% q-o-q. CapitaLand Mall Trust ended 2003 with +6.2% rental reversion; shopper traffic rose 5% y-o-y despite declining ~10% in the first 2 weeks of Apr 2003 vs. pre-SARS.
However, the impact of Covid-19 could be larger on CapitaLand Mall Trust vs. SARS as
1. variable rent now is ~5% of its rental income vs. 2% in 2003,
2. 78% of CapitaLand Mall Trust’s revenue was generated from suburban malls in 1H03 vs. 56% in FY19, and
3. China tourists now account for ~20% of Singapore's tourist arrival.

We trim our FY20F DPU by 2% to factor in
1. a one-time rent rebate of up-to 15-days for 10% of its tenants,
2. 3 months’ zero variable income for 10% of its tenants,
3. a 3- month-long 10% impact from free parking during lunch and dinner, and
4. S$5m additional marketing expenses.
Even on a prolonged 6 months Covid-19 impact on 50% of its tenants or car traffic, our FY20F DPU would decline by 7% (less than market expectation of 11%). CapitaLand Mall Trust's FY20F DPS yield would still be 4.8% (5.1% now).

CapitaLand Mall Trust (SGX:C38U) is currently trading at below -1 s.d. yield spread of 3.5%. It is also trading 1.13x P/BV vs. Frasers Centrepoint Trust (SGX:J69U) and Mapletree Commercial Trust (SGX:N2IU)'s ~1.35x. At current price, and based on its 5-year average yield spread of 3.2%, we estimate that the market has priced in 11% DPU downside from Covid-19.
We believe the impact from Covid-19 will be short term and its recent share price weakness provides good opportunity to gain exposure to the largest REIT in Singapore and third-largest in APAC (post-merger in Jun).
We trim FY20F DPU by 2% to reflect the Covid-19 impact. Our Target Price rises as we lower COE from 6.8% to 6.5%.
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.
Potential re-rating catalysts include containment of Covid-19 and stronger rental reversion.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-04

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