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

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CAPITALAND INTEGRATED COMM TR (SGX:C38U)

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

• The merger of CapitaLand Mall Trust and CapitaLand Commercial Trust creates a behemoth in CapitaLand Integrated Commercial Trust (SGX:C38U), which is double in size with 24 properties valued at S$22.4b. However, the increased diversification means that asset enhancements for existing properties will have a smaller impact due to the larger base.
• Furthermore, post-merger aggregate leverage of 41.8% leaves little debt headroom for future acquisitions.
• We see 2021F distribution yield of 5.5% as fair (vs Frasers Centrepoint Trust (SGX:J69U): 5.9%, Suntec REIT (SGX:T82U): 6.4%).
• Downgrade CapitaLand Integrated Commercial Trust to HOLD. Target price: S$2.25.
• Entry price: S$2.00.

A behemoth is created

• The merger of CapitaLand Mall Trust and CapitaLand Commercial Trust through a trust scheme of arrangement creates a behemoth, CapitaLand Integrated Commercial Trust, which is double in size with a combined portfolio of 24 properties valued at S$22.4b.
• CapitaLand Integrated Commercial Trust will become the largest REIT in Singapore and the second largest REIT in the Asia Pacific region.

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

• S-REITs with a mix of two or three asset classes tend to trade at a higher distribution yield and discount to NAV. Suntec REIT (SGX:T82U) (office: 83%, retail: 20%) and OUE Commercial REIT (SGX:TS0U) (office: 63%, retail: 11% and hospitality: 26%) trade at distribution yields of 6.4% and 8.5% respectively. Their discount to NAV is also significant at 29% and 44%.
• We consider CapitaLand Integrated Commercial Trust fairly valued with 2021F distribution yield at 5.5% (Frasers Centrepoint Trust (SGX:J69U): 5.9%, Keppel REIT (SGX:K71U): 5.9% and Suntec REIT: 6.4%).

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.

• Our forecast DPU for CapitaLand Integrated Commercial Trust is 11.1 cents for 2021F and 11.5 cents for 2022F.
• We expect CapitaLand Integrated Commercial Trust to recognise gains on the acquisition from negative goodwill of S$620.4m assuming new CapitaLand Integrated Commercial Trust units are issued to CapitaLand Commercial Trust unitholders at S$1.89 each, which is the closing price of CapitaLand Mall Trust units on the merger effective date of 28 Oct 20.
• Our estimated NAV/share post-merger is S$2.05. Our target price of S$2.25 is based on DDM (COE: 6.0%, terminal growth: 1.0%).
• Entry price is S$2.00.
• See
  • CapitaLand Integrated Commercial Trust Share Price;
  • CapitaLand Integrated Commercial Trust Target Price;
  • CapitaLand Integrated Commercial Trust Analyst Reports;
  • CapitaLand Integrated Commercial Trust Dividend History;
  • CapitaLand Integrated Commercial Trust Announcements;
  • CapitaLand Integrated Commercial Trust Latest News.
• CapitaLand Integrated Commercial Trust's share price catalyst:
  • Asset enhancement and redevelopment of existing properties.
  • Pre-commitment at CapitaSpring remains low at 34.9%. The building is targeted for completion in 2H21.

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