CapitaLand Mall Trust - DBS Research 2020-07-23: Broad Based Recovery To Revitalise Earnings Profile

CAPITALAND MALL TRUST (SGX:C38U)

CapitaLand Mall Trust - Broad Based Recovery To Revitalise Earnings Profile

CapitaLand Mall Trust's 2Q20 DPU of 2.11 Scts (-27.7% y-o-y); release of retained capital should be read positively.
Shopper footfall has recovered to 53% of pre-COVID level since 19 June.
Lower than anticipated drop in portfolio valuation of 2.5%.
BUY, our S$2.40 Target Price implies a 1.13x price-to-book and 5.0% FY21F dividend yield.

CapitaLand Mall Trust (SGX:C38U) reported DPU and distributable income of 2.11 Scts (-27.7%) and S$78.1m (-27.5%) respectively for 2Q20.
Approximately one-third of the S$69.6m retained in 1Q20 was released as distributions this quarter, bringing the pay-out ratio to 142%.
CapitaLand Mall Trust's 1H20 DPU was 2.96 Scts; on our calculations, 1H20 DPU would have been 4.35 Scts, 47% higher than the announced DPU of 2.96 Scts if the remaining retained income was released.
1H20 NPI fell 20.8% y-o-y due to rental waivers given to tenants affected by COVID-19 and lower turnover rent, and was partly mitigated by incremental contributions from Funan mall, which reopened at the end of June 2019, and lower operating expenses.

The vast majority of tenants have resumed operations post phase 2 of reopening of the Circuit Breaker (19 June to 5 July) and shopper visitations have recovered to 53% of the level a year ago.
Rental relief packages to tenants had increased to S$154.5m from S$114m in 1Q20, comprising rental waivers from CapitaLand Mall Trust, property tax rebates and cash grants with a further option for tenants to use one-month of security deposits to offset rents.
CapitaLand Mall Trust has an estimated 60% portfolio exposure to SME tenants, while pending further clarifications on the qualifying requirements.
Shopper traffic and tenant sales declined by 40.6% and 15.4% y-o-y in 1H20, with the trough in 2Q20 with traffic and sales retreating 72% and 31%.
Lease pre-terminations and tenants who had filed for rent deferral remains manageable at approximately 2% and 1% of portfolio NLA respectively.

Gearing at 34.4% as at end 1H20 remains healthy, and was primarily due to a decline in portfolio valuations.
Average cost of debt decreased 10 bps to 3.1% while interest coverage weakened from 4.6x to 4.3x q-o-q.

Portfolio occupancy declined to 97.7% from 98.5% in 1Q20, affected by a drop-in occupancy at CapitaLand Mall Trust’s central malls and IMM Building.
Rental reversions for leases signed in the quarter was marginally positive at 0.1%.
Weighted average lease expiry as at end of the quarter was 2.0 years with 7.7% of leases by gross rental income up for renewal during the rest of the year.

CapitaLand Mall Trust (SGX:C38U)’s overall portfolio valuation declined 2.5% in the latest round of review, which was lower than consensus’ expectation of a 5% drop in retail valuations.
The decline in valuation was led by central malls (- 3.3%) as opposed to suburban malls (-2.1%).
Valuers assumed softer rental growth outlook with cap rates remaining intact.
This gives investors confidence that capital valuations will hold up relatively better in Singapore than what we have seen in the other parts of the world.
Recovery in valuations will likely be swift with Singapore in a unique position where commercial assets are less liquid and tightly held.

The release of one-third of income retained in 1Q20, which was earlier than anticipated, reiterates our view that the worse is likely over.
Pre-terminations and tenants seeking rent deferrals were at manageable levels in 2Q20, which would have been a trough quarter for the year.
Tenant sales will be a figure that we will monitor, as all trade categories (with the exception of supermarkets and books & stationaries) posted a double-digit y-o-y decline in 1H20 sales.

Singapore Research DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-07-23

SGX Stock Analyst Report BUY MAINTAIN BUY 2.400 SAME 2.400