• Keep BUY, higher TP of SGD2.30 from SGD2.20, 10% upside and 5% yield. CapitaLand Integrated Commercial Trust posted a good set of operational numbers (1H) and DPU was in line. Key highlight: Stronger-than-expected double-digit office rent reversions, which reinforces our positive stance against a slightly bearish consensus view. Retail operational metrics continue to show steady improvements, but focus will be on slowing tenant sales growth. Acquisitions are likely back on the cards – potentially from its sponsor’s Singapore pipeline. We believe this will be paired with divestments.

• Rent reversions strengthened in 2Q across both office and retail portfolio with office (1H) and retail rose 15% (1Q: +14.1%) and 9.3% (1Q: +7.2%). Management maintained high single-digit guidance for both segments, but we see room for outperformance, particularly on the office front. Office demand came from a mix of real estate and financial services sectors on a good mix of expansion demand – offsetting downsizing – while new demand remains mostly bite-sized. Focus will be on retaining existing tenants. On the retail front, tenant sales growth eased YoY in 2Q – CICT attributed this to a mix of more outbound travel and normalising of demand for certain segments, eg sports and home & living, from a high base last year. Overall portfolio occupancy was held relatively stable at 96.8% (-0.2ppts QoQ).

• A potential acquisition could be the call option exercise for the remaining 55% stake in the iconic CapitaSpring – the funding for which could come from divestment of some of CICT’s mature/non-core assets, eg Bukit Panjang Plaza, 21 Collyer Quay, and Citadines Raffles Place.

• CQ @ Clarke Quay officially reopened post its asset enhancement into an all-day mall in April and has been seeing healthy demand, with occupancy increasing to 92.7% (1Q: 90%). Gallileo’s redevelopment is also on track, with committed occupancy improving to 96.7% and phased handover expected from 2H25. Asset enhancements for IMM are expected to be completed by end 2024 and is on track to meet the ROI target of c.8%.

• 1H DPU up 2.5% YoY, flat HoH – aided by revenue growth and better operational cost management that outpaces financing cost increases. Net property income margins rose 2.2ppts YoY from lower utility and fixed costs from the new property management fee structure – these are likely to be maintained, with utility costs hedged lower until 2025. Financing costs have stabilised at c.3.5%, with similar guidance for the full year.

• We tweak higher FY26F-27F DPU by 2-3% by lowering interest costs and slightly adjusted down our cost of equity assumption by 20bps, resulting in a higher TP. As CICT’s 3.4 ESG score is three notches higher than the country median, we have applied a 6% ESG premium to reflect this.

Source: RHB Research - 14 Aug 2024