CapitaLand Integrated Commercial Trust - UOB Kay Hian 2020-11-18: Bigger Scale But Slower Growth; Downgrade To HOLD


CapitaLand Integrated Commercial Trust - Bigger Scale But Slower Growth; Downgrade To HOLD

A behemoth is created

Increased diversification and reduced concentration.

  • CapitaLand Integrated Commercial Trust has eight office properties, 11 retail properties and five integrated developments, which account for 38%, 33% and 29% of portfolio valuation respectively. The expanded scale comes with increased diversification and reduced concentration risk.
  • Net property income contribution from the top-5 properties is reduced from CapitaLand Mall Trust’s 50% and CapitaLand Commercial Trust’s 82% to CapitaLand Integrated Commercial Trust’s 43% post-merger. The size of properties ranges from the largest Raffles City Singapore (RCS) at 14.6% of enlarged assets under management (AUM) to JCube at 1.2% (average size per property: 4.2% of AUM).

But enhancements become less impactful.

  • Management is mulling enhancements for JCube, Westgate, IMM Building, Junction 8, Capital Tower and The Atrium@Orchard. These projects incur additional capex and result in downtime without revenue contribution.
  • Also, the positive impact of asset enhancement initiatives and redevelopment for existing properties would be moderated due to the enlarged base of properties. It gets more difficult to move the needle for contribution to the overall portfolio.

Averaging down to a slower growth rate.

  • The law of averages dictates that growth in the retail business unit could be offset by a slowdown in the office business unit, and vice versa. The synchronised growth in both retail and office business units would be a rarity.

Remains grounded in Singapore and developed markets.

  • CapitaLand Integrated Commercial Trust intends to be anchored in Singapore with overseas exposure capped at 20%. It intends to focus on developed markets, such as Europe and Japan. However, being the largest off-take vehicle within CapitaLand, CapitaLand Integrated Commercial Trust is likely to play a pivotal role in CapitaLand’s goal of achieving asset recycling of S$3b per year.

Fairly valued relative to peers

Higher aggregate leverage leaves little headroom for acquisitions.

  • CapitaLand Mall Trust’s aggregate leverage is estimated to increase from 32.9% pre-merger to 41.8% post-merger. This would be caused by cash consideration of S$1,000.2m for the acquisition of CapitaLand Commercial Trust and consolidating RCS’ debts of S$1,218m. Our estimate of aggregate leverage is higher than 38.3% as of Dec 19, which management provided, due to decline in fair value of investment properties of S$279.6m for CapitaLand Mall Trust and S$131m for CapitaLand Commercial Trust in 1H20.

Downgrade CapitaLand Integrated Commercial Trust to HOLD.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-18
SGX Stock Analyst Report HOLD DOWNGRADE BUY 2.25 DOWN 2.55