• 3Q16 DPU down 6.7% YoY
• Expect distribution of income retained
• Upgrade to BUY

3Q16 results within our expectations

CapitaLand Mall Trust (CMT) reported a 4.9% YoY increase in its 3Q16 gross revenue to S$169.7m. This was largely driven by the acquisition of Bedok Mall on 1 Oct 2015, and higher rental contribution from IMM Building (+14%) and Clarke Quay (+8.4%), but partially offset by the cessation of operations of Funan DigitaLife Mall for redevelopment. NPI grew at a faster pace of 5.5% to S$119.5m due to a slightly improved NPI margin of 70.4% (+0.3 ppt). However, DPU was down 6.7% YoY to 2.78 S cents. This was because DPU in 3Q15 included the release of S$8.0m (~0.23 S cents/unit) of taxable income retained in 1Q15.

Excluding this impact, CMT’s adjusted DPU would have grown 1.1%. For 9M16, CMT’s gross revenue and NPI rose 6.5% and 6.8% to S$520.4m and S$363.5m, with the latter forming 74.7% of our FY16 forecast. DPU of 8.25 S cents represented a decline of 1.4%, and constituted 73.6% of our full-year projection. We note that CMT had retained S$12m of its taxation income available for distribution in 1Q16, which we expect to be paid out in 4Q16.

Higher occupancy but rental reversions eased further

Operationally, CMT registered higher occupancy of 98.6% (+0.7 ppt QoQ), underpinned by a strong improvement at Clarke Quay. On a 9M16 basis, CMT’s shopper traffic increased by 2.9%, while tenants’ sales psf per month inched up 1.2%. However, rental reversions moderated further to 1.3%, versus 1H16’s 1.7% figure, with the drag coming from The Atrium@Orchard, Bugis+ and Westgate.

Upgrade to BUY from HOLD

We maintain our forecasts and fair value estimate of S$2.23 on CMT given this in-line set of results, but upgrade our rating from Hold to BUY as we now see potential total returns of 11%. We view CMT as a good quality defensive REIT to own amid the current volatility in the financial markets, given its high trading liquidity (average 6M daily value traded of S$18.3m), prudent capital management and largely resilient portfolio. Based on our projections, CMT is currently trading at FY16 and FY17 distribution yield of 5.3% and P/B ratio of 1.11x.

Source: OCBC Research - 24 Oct 2016