• Valuations attractive
• FY16F yield +1.5 SD above 5-year mean
• Expect stable DPU growth

Risk reward compelling

Following CapitaLand Mall Trust’s (CMT) recent share price weakness, we believe its risk-reward is now compelling, with the stock trading at 6.0% FY16F distribution yield. This is 1.5 standard deviations above its 5-year forward average of 5.5%. From a book value perspective, CMT’s FY16F P/B ratio is 1.06x, and this is also attractive, in our view, as it is close to 1.5 standard deviations below its 5-year forward mean of 1.16x.

Seeking to unlock asset value

CMT’s management is constantly seeking to enhance the value of its portfolio by carrying out asset rejuvenation works and tenant repositioning exercises to make its malls more relevant to consumers. An example of this is Tampines Mall, whereby CMT reconfigured its second and third level to boost its fashion offerings, bringing in new tenants such as H&M.

It is also speeding up phase two of its AEI at IMM Building. More recently, CMT announced its plans to redevelop Funan DigitaLife Mall into an integrated development, given its untapped GFA of ~388,000 sqft. As a result of this, the mall is expected to be closed in 3Q16, and redevelopment works will take approximately three years.

Still room for growth

While we are cognisant of challenges facing retail landlords, we expect CMT to continue delivering stable growth to its unitholders. We forecast DPU growth to come in at 2.3% and 2.5% for FY15 and FY16, respectively, partly driven by contribution from its recent Bedok Mall acquisition. We have a BUY rating on CMT, with a fair value estimate of S$2.09. This translates into an expected total potential returns of 16%.

Source: OCBC Research - 11 Dec 2015