• 1Q14 DPU up 3.9% YoY
• Rental reversion of 23.0%
• Minzhongleyuan to reopen in 2Q

Positive start to FY14

CapitaRetail China Trust (CRCT) reported a promising set of 1Q14 results, with gross revenue growing 15.5% YoY to RMB231.7m and NPI up 17.9% to RMB155.6m. The improved performance was due to contributions from newly-acquired Grand Canyon and higher rentals from its existing malls. In SGD terms, gross revenue and NPI grew at a faster 22.4% and 25.0% YoY to S$48.1m and S$32.3m, respectively, as a result of a stronger RMB. Distributable income rose 13.2% to S$19.6m, while DPU was up 3.9% to 2.40 S cents. This is largely in line with our expectations, as the quarterly DPU formed 25.1% of our FY14 forecast.

Strong operational performance

Leasing demand at the multi-tenanted malls remained robust. Particularly, CRCT again strengthened the occupancy and tenant mix at Grand Canyon since its acquisition in Dec 2013. Occupancy at the mall, we note, stood at 99.8%, up from 95.9% in prior quarter, and included new quality tenants such as Li Ning and Childhood Villas. Over the quarter, positive rental reversion averaging 23.0% was also achieved for the 165 leases renewed/secured at the multi-tenanted portfolio, with Grand Canyon leading the pack at 42.8% growth. Management shared that tenant sales increased 13.9% YoY, whereas shopper traffic grew 7.3%. All these activities helped to contribute to a 39.2% NPI growth for the multi-tenanted malls. For CRCT’s master-leased malls, a 10.1% NPI growth was registered, similarly respectable in our view.

Downgrade on valuation grounds

CRCT disclosed that the asset enhancement works for CapitaMall Minzhongleyuan is near completion, and that ~90.0% of the mall’s total NLA has been secured or in advanced negotiations for leasing commitments. In addition, the secured rental was 11.5% higher than budgeted. With the mall’s scheduled reopening in 2Q14, we expect it to provide additional rental uplift to CRCT’s earnings. CRCT is currently the top performer in the S-REITs sector, clocking a 13.2% gain YTD. At its present level, we believe CRCT is justly valued, with limited upside over the near term. As such, we downgrade CRCT to HOLD from Buy. Our fair value is raised marginally from S$1.54 to S$1.55 after factoring in the results.

Source: OCBC Research - 28 Apr 2014