• Maintain NEUTRAL and TP of SGD2.35, 1% upside. CapitaLand Integrated Commercial Trust posted stable 1Q22 income that is a tad below our estimate. Its retail operating performance was flattish, while office assets had higher occupancy rates and positive rental reversions. The sharp rise in utility costs are expected to dampen DPU by c.4%. Its valuation is fair, at 1.1x P/BV, with a 5% yield and a risk-reward that is finely balanced. Key catalyst: A sharp recovery in retail rental rates, while the key downside risk is an unexpected slowdown in the Singapore economy.

• 1Q NPI up 0.5% YoY or 5% QoQ, aided by lower rental assistance, and acquisition contributions. There has been a slight delay in the completion of its earlier announced 101-103 Miller St and Greenwood Plaza acquisition, which is expected to close in end-2Q (vs 1Q formerly). CICT has signed a fixed energy rate until end-2022, but it is almost double that of the previous contract which ended in late 2021. Management guided that a doubling of FY21 utilities cost may impact FY21 DPU by -4% to -5%. Its debt expiry profile is well spread, with an average maturity of 3.9 years and 10% of debt maturing this year. About 85% of its debt is fixed, and a 1% increase in interest rates will have a negative 1.8% impact on its DPU.

• Retail tenant sales rose 0.6% YoY with downtown malls (+1.9%) and suburban malls (-0.8% YoY), and we expect a mid-high single digit increase in 2Q with the full economic reopening. Portfolio mall occupancy dipped by 0.2ppt QoQ to 96.6%, mainly on lease expires at Clarke Quay (excluding which would be 98.3%) where management has been looking at rejigging its tenant mix. Rental rates remain under pressure, with a -1.3% reversion on average (-4.1% incoming vs outgoing), dragged by downtown malls.

• Healthy office rental reversion of +9.3% indicating continued momentum in the Singapore CBD market, with demand stemming from the IT, media, banking & finance and energy & commodities sectors. Physical occupancy at its assets stands at 47% for week ended 22 Apr, and this is expected to increase further with the recent removal of all restrictions. Singapore office occupancy increased 1.9ppt QoQ to 92.3%, mainly driven by higher occupancy at CapitaSpring (98.5%) and Six Battery Road.

• Gearing at 41% post completion of the CapitaSky and Australian acquisitions indicate that subsequent acquisitions are likely to come with equity fund-raising. Management earlier hinted that its next potential acquisition will likely be in Singapore – likely CapitaSpring’s remaining 55% stakes, which are estimated at about SGD1bn.

• No changes to our estimates. Our ESG score of 3.3 out of 4.0 is based on RHB’s proprietary in-house methodology, and reflects CICT’s committed efforts to reduce its carbon footprint and its good governance. As the score is three notches above the country median, we have applied a 6% ESG premium to derive our TP.

Source: RHB Research - 4 May 2022