• DPU fell 4.4% YoY
• Implementation of VAT reform
• FV increases to S$0.52

2Q results in line with expectations

CRCT’s 2Q16 results were in line with our expectations. DPU fell 4.4% YoY to 2.61 S cents, or 24.0% of our full-year forecast. Gross revenue decreased by 5.1% to S$51.5m, mainly due to weaker RMB against SGD as revenue fell 1.1% in RMB terms. With the implementation of China VAT reform on 1 May 2016, revenue from May to June is netted off against 5% VAT. Gross revenue formed 23.4% of our full-year forecast, or around 24.2% after accounting for the VAT rule.

Net property income fell 1.5% YoY to S$35.5m, forming 24.4% of our full-year forecast. Occupancy remained flat, increasing slightly from 94.6% as at 1Q16 to 94.9% as at 2Q16. Portfolio rental reversion came in at 5.1% higher for 6.3% of NLA that was up for renewal. Gearing stands at 29.2% (v. 28.7% last quarter) with an average cost of debt of 2.97% (v. 3.04% last quarter).

Minzhongleyuan and Wuhu still struggling

Both CapitaMall Minzhongleyuan (MZLY) and CapitaMall Wuhu continue to face challenges, posting 30.4% YoY and 27.5% YoY fall in gross revenue contribution in RMB terms, though these numbers are skewed by the VAT application. With regard to NPI for 2Q16, MZLY’s loss of RMB 1.92m widened both QoQ (loss of RMB 1.12m in 1Q16) and YoY (loss of RMB 1.20m in 2Q15) while Wuhu’s loss of RMB 0.57m narrowed QoQ (loss of RMB 1.53m in 1Q16). The management is targeting a committed occupancy of 90% for MZLY (70.5% as at 2Q16) and of 80% to 90% for Wuhu (63.7% as at 2Q16) by the end of the year.

Lowered risk-free rate

Going forward, we adjust our FY16 and FY17 revenue numbers to reflect the VAT application. After fine-tuning our occupancy and rental reversion assumptions and updating our SGDRMB rate, our full-year NPI forecast drops from S$145.7m to S$142.2m. CRCT’s 1H16 NPI comes up to 50.8% of this updated full-year forecast.

Our FY16 DPU forecast drops from 10.9 S-cents to 10.7 S-cents. We lower our risk-free rate from 3.0% to 2.4%, our fair value increases from S$0.43 to S$0.51 as we update the parameters of our DDM model.

Using yesterday’s closing price of S$1.56, CRCT is trading at a blended FY16/17 distribution yield of 7.2%, and 97% of NAV as at 2Q16. Maintain HOLD with an updated fair value of S$0.51.

Source: OCBC Research - 28 Jul 2016