CapitaLand Integrated Commercial Trust - RHB Invest 2022-10-25: Value Emerging Amid Market Selloff; Upgrade To BUY

CAPITALAND INTEGRATED COMM TR (SGX:C38U)

CapitaLand Integrated Commercial Trust - Value Emerging Amid Market Selloff; Upgrade To BUY

CapitaLand Integrated Commercial Trust (SGX:C38U)'s 3Q22 business update indicates positive levers from reopening continue to outweigh cost and rising rate pressures. (See CapitaLand Integrated Commercial Trust's announcement dated 2022-10-21.)
We remain cautiously optimistic on 2023 outlook, with additional cash flow expected from its committed leases. Like its peers, CapitaLand Integrated Commercial Trust's share price has fallen 16% in the last month (see Share Price Performance Of S-REITs), and while volatility should persist in the near term, we see current share price level as a good entry point for the long term.

CapitaLand Integrated Commercial Trust's 3Q/9M22 NPI rose 12.7% and 8.4% y-o-y on the back of higher revenue from office, integrated portfolio and acquisition contributions. NPI margin (3Q22) stood at 73% (3Q21: +74%), impacted by higher utility expenses as most of its utility hedges expired in 2Q22.
CapitaLand Integrated Commercial Trust will be gradually rolling out higher service charges (expected revenue boost ~1-2%) to offset rising costs and mitigate inflationary pressures. Four key assets (CapitaSpring, Six Battery Road, Capital Tower and Asia Square Tower 2 ) will also see a significant cash flow increase starting FY23F as ~15% of the committed occupancy at these assets is expected to start fully contributing.
Operating metrics improved across the board, with portfolio committed occupancy rising 1.3ppts q-o-q to 95.1%. Higher occupancy was driven mainly by its Singapore office portfolio which rose 3.1ppts q-o-q to 96%, while retail and integrated portfolio also saw slight improvements in 3Q22.
Office asset rent reversion (9M22) stood at 7.9% – a slight moderation from 1H’s 8.5%. Rent reversion (average) at its retail malls turned positive (9M22) – 0.6% (vs. 1H22 -0.5%) – marking a turnaround since COVID-19, buoyed by a strong rebound in downtown malls with healthy return to office trends (~70%).
Year-to-date tenant sales rose by 21%, which have well surpassed pre-COVID-19 (2019) levels, boosted by local as well as tourist spending.

CapitaLand Integrated Commercial Trust's gearing is on the higher side at 41.2% vs peers. Portfolio asset value is expected to hold firm and thus should not impact gearing adversely. Overall cost of debt rose 10bps q-o-q to 2.5%, and ~80% of its debt is currently hedged, with every 100bps increase in rates impacting CapitaLand Integrated Commercial Trust's DPU by ~-3%.
About 12% and 17% of its debt is due for expiry in FY23F-24F, which is likely to be rolled over with a 100-150bps increase in finance costs.

We revise lower our FY22F-24F DPU forecast for CapitaLand Integrated Commercial Trust by 3-4%, factoring in higher finance costs and moderating our rent growth assumptions. We also raise our COE assumption by 50bps to 7.4% amidst a sharp increase in rates assumptions resulting in a lower target price.
CapitaLand Integrated Commercial Trust has one of the highest ESG scores among S-REITs, at 3.3 (out of 4.0). This is three notches above the country median, and thus we apply a 6% ESG premium.
Upgrade CapitaLand Integrated Commercial Trust to BUY from Neutral, with new S$2.00 target price from S$2.30, 15% upside and ~6% yield.
See

Vijay Natarajan RHB Securities Research | https://www.rhbgroup.com/ 2022-10-25

SGX Stock Analyst Report BUY UPGRADE NEUTRAL 2.00 DOWN 2.300