• Trading at more reasonable valuations
• Upside risk in other EFR options
• Upgrade to HOLD

Trading at More Reasonable Valuations

Since our downgrade on 11 Jun, CapitaLand Retail China Trust (CRCT) has posted negative returns of -3.9% vs. the FTSE Straits Times REIT Index’s +1.1% and the Straits Times Index’s +1.0%. According to Bloomberg consensus, as at 13 Jun’s close, CRCT is trading at a 12m blended forward dividend yield of 6.9%, 0.5x standard deviations below its 5 year average.

With regard to the proposed acquisition of three more malls in Harbin and Changsha, we note that the estimated amount that needs to be raised from the equity markets remains sizeable relative to CRCT’s market capitalization (~19% of market cap according to our 38% target gearing level).

Rights issues are mostly employed for situations where the gross proceeds to be raised are significant relative to the REIT’s market capitalization. For the past ten S-REITs rights issues, the gross proceeds raised as a proportion of market capitalization (preannouncement) ranged from 13% to 57%.

Upside Risk to Thesis: Other Possible EFR Options

That said, we note that other equity fundraising options are available to CRCT (besides a rights issue) that would likely be more favourable for DPU accretion. While private placements tend to be small and usually raise gross proceeds of <10% market capitalization, it is not necessarily so.

Furthermore, private placements may also be paired with (non-renounceable) preferential offerings with the new units issued at discounts of less than 10%. A recent example is Frasers Centrepoint Trust (FCT), which conducted a S$67.7m preferential offering and a S$369.6m private placement; gross proceeds are to total ~19% of its market cap pre-announcement.

For CRCT, should they be able to conduct a private placement and preferential offering in the likes of FCT and others, that financing option would likely be more DPU accretive for current unitholders. We see the use of other forms of EFR as the main upside risk to our fair value. We continue to believe that the addition of the three malls to CRCT’s portfolio remains a strategically wise transaction.

Our fair value remains at S$1.38 for now; we will revise accordingly as financing details are announced. Given that the REIT is trading at more reasonable valuations, we upgrade CRCT from Sell to HOLD.

Source: OCBC Research - 14 Jun 2019