• Keep NEUTRAL, with new TP of SGD2.30 from SGD2.35, 8% upside. 1H22 results came in slightly below our expectations. Operationally, many of CapitaLand Integrated Commercial Trust’s assets are still ramping up, resulting in weaker income growth compared to peers. The REIT has also been slightly more impacted from higher utility costs, with most of its hedges rolling over to high market rates. With relatively high gearing, we believe accretive acquisitions are likely to be challenging, and see limited catalysts.

• Flattish 1H DPU as income growth was offset by higher expenses and a larger unit base, accounting for c.47% of full year DPU. Operating expenses (1H) rose 4.4% YoY, driven by a 48% increase in utility costs as its fixed hedges expired in 2Q, with the full impact to be felt from 2H. The impact is expected to be offset by a gradual rollout of higher service charges. Interest costs crept up by 10bps to 2.4%, with a slightly lower fixed hedge of 81% (from 85%). About 12% or c.SGD1.2bn of loans are due for expiry in 1H23, which we believe should push interest costs slightly higher by 10-20bps.

• Singapore office portfolio remains a bright spot, with occupancy improving 0.6ppt QoQ to 92.9% and is set to move higher in 2H, with 13% of leases at Capital Tower under advanced negotiations. 2H22-2023 should also see a ramp up in income contribution as many of its Singapore assets (CapitaSpring, Six Battery Road, and 21 Collyer Quay) are in a ramp- up/rent-free phase. Rent reversion (1H) stayed strong at +8.5% and is expected to remain in mid-to-high single digits for rest of the year. On the other hand, performance of its Australia market remains soft with 66 Goulburn Street occupancy declining 4.8ppts QoQ, and a slower-than- expected ramp up at 100 Arthur Street (68.8%). Commerzbank, anchor tenant occupying nearly 98.2% of Galileo, Frankfurt, will also be vacating in early 2024 and could pose leasing challenges in current market conditions.

• Retail sector is staging a recovery, with average rent reversion (1H) turning flattish at -0.5% (excluding. Raffles City +1.1%). Tenant sales at its malls rose 16% YoY, and is near pre-COVID-19 levels with a sharp recovery at downtown malls post full reopening in 2Q. Portfolio occupancy remains flattish at 98.5%. Clarke Quay, which bore the brunt of the impact during COVID-19, is set to undergo major asset enhancements (AEI) at an estimated capex of SGD62m, transforming it into a day-and-night destination. The AEI will be done in phases until 3Q23, with ROI estimated to be in the mid-single digits.

• Possible candidate for Mercatus assets (Mercatus Asset Sale), but we see limitations in terms of DPU accretion, with a high gearing of 40.6%.

• We lower FY22F-24F DPU by 2-3% factoring in lower NPI margin. CICT has a high ESG score of 3.3 out of 4.0. As its score is three notches above the country median, we apply a 6% ESG premium.

Source: RHB Research - 29 Jul 2022