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


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.

What’s New

2Q20 DPU of 2.11 Scts (-27.7% y-o-y), release of initial capital retained to be read positively

  • 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.

Pre-terminations and tenants seeking rental deferrals remains manageable

  • 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.

Financial metrics resilient

  • 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.

Lower occupancy within expectations

  • 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.

Outlook & recommendation:

Lower than anticipated dip in valuations

  • 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.

Worse is likely over with minimal retention in the quarter

  • 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.

Maintain BUY, target price unchanged at S$2.40

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