• Upgrade to BUY from Neutral, with new SGD2.00 TP from SGD2.30, 15% upside and c.6% yield. 3Q business update indicates positive levers from reopening continue to outweigh cost and rising rate pressures. 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, and while volatility should persist in the near term, we see current share price level as a good entry point for the long term.

• 3Q/9M22 NPI rose 12.7% and 8.4% YoY 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 2Q. CICT 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 c.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 QoQ to 95.1%. Higher occupancy was driven mainly by its Singapore office portfolio which rose 3.1ppts QoQ to 96%, while retail and integrated portfolio also saw slight improvements in 3Q. Office asset rent reversion (9M) stood at 7.9% – a slight moderation from 1H’s 8.5%. Rent reversion (average) at its retail malls turned positive (9M) – 0.6% (vs. 1H -0.5%) – marking a turnaround since COVID-19, buoyed by a strong rebound in downtown malls with healthy return to office trends (~70%). YTD tenant sales rose by 21%, which have well surpassed preCOVID-19 (2019) levels, boosted by local as well as tourist spending.

• Asset recycling likely with limited inorganic growth potential. 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 QoQ to 2.5%, and c.80% of its debt is currently hedged, with every 100bps increase in rates impacting DPU by c.-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 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 TP. CICT has one of the highest ESG scores among SREITs, at 3.3 (out of 4.0). This is three notches above the country median, and thus we apply a 6% ESG premium.

Source: RHB Research - 25 Oct 2022