• 2Q15 DPU at 2.08 cents (+3.0% yoy), giving an attractive market distribution yield of 8.6%
• Poised for more growth in 2H15 with positive rental reversion from Mallage Shobu
• Extend currency hedges over income distribution to FY15 and FY16 to mitigate forex risks
• Maintain at BUY with revised TP$1.08 based on DDM valuation

What is the news?

CRT posted 2Q15 revenue at JPY1952mn (51.7% yoy, 14% qoq), lifted by the contribution of new acquisitions of Luz Omori, Croesus Tachikawa and One’s Mall, and better tenant sales at Mallage Shobu. 2Q15 distribution income grew at a lower 22.7% to JPY874mn due to higher finance expenses from increased debt for acquisitions. DPU for the quarter grew marginally 3% yoy to SGD2.08 cents, bringing the YTD DPU to SGD4.16 cents, translating into a distribution yield of 8.6%. CRT extended the currency hedges to cover income distribution up to 30 June 2016 to protect against weakening Yen, locking the SGDJPY rate at JPY82 and JPY85 in FY15 and FY16 respectively. CRT will be implementing the Distribution Reinvestment Plan (DRP) for the upcoming distribution where investors can opt to receive payment of 2.50 SGD cents in cash or units.

How do we view this?

Stronger earnings performance ahead with positive rental reversions from Mallage Shobu in 4Q15 – There are about 155 tenants due for renewal in Mallage Shobu, one of the key assets under CRT’s portfolio. Negotiations for the renewals are on track. Approximately one third of these tenants will renew the leases while the balance will be replaced. The management expect the performance in 3Q15 to be flat as there will be some downtime for the transition of new tenancy mix, mitigated by the higher contribution from the One’s Mall. We estimate positive rental reversion rate to be in mid-to-high teens range, spearing stronger performance in 4Q15.

Optimistic outlook in Japan retail scene – With the delay of second round of tax hike by 18 months to April 2017 and policy easing, private consumption could accelerate ahead as cheap oil prices boost consumers' purchasing power and the negative impact of the sales tax hike fades. Consumer spending is expected to improve this year as consumer confidence index (seasonally adjusted) marginally improves to 39.1 in Jan 2015 from 38.8 in Dec 2014. CRT should benefit from the recovering consumer spending sentiment and continue to deliver stable returns to the shareholders.

Investment Actions

We favour CRT for its attractive distribution yield and stable income-producing quality assets. With the change of analyst, we modified our valuation methodology to DDM (Cost of equity 8.5%, terminal growth 1%) to reflect CRT’s performance as a dividend play. Maintain Buy with revised TP$1.08.

Source: Phillip Securities Research - 12 Feb 2015