• Stay NEUTRAL with unchanged TP at SGD2.00, 2% downside. CapitaLand Integrated Commercial Trust reported in-line 1H results. Operational metrics slightly surprised on the upside with healthy retail rent reversions and improvement in overseas assets. Moving into 2H, operational cost pressures are expected to taper off, but interest cost is expected to see a slight increase. CICT has gearing on the high side, with equity fund-raising a possibility, coupled with acquisitions. Overall, we recommend buying on dips, with large divestments and a rate pause as key catalysts, and the onset of a recession as a key risk.

• 1H DPU up 2% YoY aided by better performance from Singapore and contributions from acquisition, partially offset by higher financing costs (+47% YoY) and utility expenses. In 2H utility costs are expected to come off by c.16%, resulting in slightly higher margins, but we expect average interest cost to rise 10-20bps in 2H offsetting the impact; c.78% of its debt is currently fixed and every 100bps increase should result in c.3% DPU decline from the unhedged portion. In 1H, CICT received a one-off government grant income of SGD34.4m in relation to the construction of the underground pedestrian link at Funan. Based on management’s internal assessment, portfolio value remains largely stable, with slightly better valuations in Singapore offsetting weakness in overseas assets.

• Remains positive on retail; slightly cautious on office outlook. Retail portfolio occupancy rose 0.2ppts QoQ to 98.7% with rent reversions strengthening to 6.9% for 1H (1Q: 6%) supported by healthy tenant sales which are c.8% higher than pre-COVID-19 levels. The ongoing asset enhancements at CQ@Clarke Quay are expected to be completed later this year, with committed occupancy currently at 85% and expected to rise further. Office occupancy rose 0.6ppts QoQ to 95.4% mainly from overseas assets: i) At 66 Goulburn Street in Sydney which saw good demand for its new fitted-out suites and ii) MAC in Frankfurt. Rent reversions for Singapore office are expected to moderate amidst slowing demand and higher supply. Gallileo, Frankfurt will undergo a major asset enhancement for 18 months from Jan 2024, with significant capex expected and no income contribution from the asset (c.1.5% NPI) during this period. CICT is currently in discussion with a large financial services tenant who plans to take up most of the space in Gallileo, post completion.

• Gearing on the high side at 40.4%. We believe there is a possibility of equity fund-raising in the near term, that could be coupled with a potential acquisition of balance interest in CapitaSpring from the sponsor.

• High ESG score of 3.3 (out of 4.0). As this score is three notches above our country median score, we have applied a 6% ESG premium. Our FY24/25F DPU estimates are fine-tuned by +1%.

Source: RHB Research - 2 Aug 2023