• Downgrade to NEUTRAL from Buy, TP remains at SGD2.00, 5% downside. CapitaLand Integrated Commercial Trust’s 2H22 and FY22 results were slightly below our expectations. Portfolio operating metrics improved in 4Q22 and FY22, but growth was comparatively lower vs that of peers. The positive momentum is expected to be maintained in 1H23 before slowing down in 2H23 – but operational gains will be offset by higher interest and inflationary pressures. Valuations are fair – CICT is trading at its BV and offers 5% dividend yields.

• 2H22 distributable income and DPU rose 5% YoY and 3% YoY aided by rental growth and acquisitions. This was partly offset by higher interest expenses. FY22 DPU was at 97% of our forecast, being dragged down by higher-than-expected financing costs. CICT’s overall portfolio (on a same- store basis) was stable, as the gains on Singapore assets were offset by losses at the German segment due to higher discount rates, terminal yield as well as FX impact. Service charges have been raised across assets, which should partially offset utility and operating cost pressures ahead.

• About 81% of the REIT’s borrowings are hedged but this could fall to 70% if CICT decides to roll over its debt expiring this year to floating interest rates. Overall interest cost for FY23 is expected to be in the mid 3% levels (from 2.7%). Every 1% increase in rates will have a c.3% impact on DPU.

• Rent growth expected to slow down but remain positive. Retail and office rent reversions both turned positive in FY22, at 1.2% and 7.6% respectively, with stronger rent growth recorded in 4Q22. Looking ahead, the momentum is expected to carry on in 1H23. Although market demand has softened slightly, the supply remains tight for both segments, with low- single digit positive rent reversions expected. On the retail front, tenant sales (FY22) rose 23% YoY, with a sharper recovery seen in downtown malls. Potential upside could come from Raffles City Singapore hospitality portfolio for FY23. Overall committed occupancy rose 0.7ppt QoQ to 95.8%, and is expected to remain firm at c.95% levels this year.

• Acquisitions are challenging as CICT’s net gearing is on the high side at 40.4% but there is a possibility of the REIT paring down its stake in some office assets, or selling smaller malls and increasing its stake in some newer assets, ie CapitaSpring and CapitaSky. Ongoing asset enhancements at CQ @ Clarke Quay is expected to be completed by 3Q23, and committed occupancy (including leases in advanced negotiations) stands at 80%.

• We trim FY23-24F DPU by 2-3% by mainly adjusting interest cost assumptions. CICT has one among the highest ESG scores among the S- REITs under our coverage, at 3.3 (out of 4.0). This is three notches above the country median, so we applied a 6% ESG premium to its intrinsic value to derive our TP.

Source: RHB Research - 2 Feb 2023