• CMT's steady 2Q18 results imply that operations are bottoming out. 
• Rental reversions stable at +0.8%; ahead of expectations, which is a positive. 
• Gearing inches down to 31.5%; ample capacity to acquire properties opportunistically. 
• Target Price raised to S$2.30. 

BUY With Target Price of S$2.30

CapitaLand Mall Trust (CMT) remains a safe harbour for investors, supported by a resilient and attractive yield of 5.5%. With signs that the retail sector is bottoming out, we believe that investors’ concerns on the potential earnings downside risk will dissipate.

BUY call maintained, Target Price is raised to S$2.30 as we roll forward valuations. 

Where We Differ: We Remain Positive Despite a Divided Street

While the street remains divided on the stock given the uncertainties over the impact of the surge in new retail supply over 2018-2019, we believe the new supply may not be as threatening to CMT. According to our analysis, only less than 50% of the incoming new supply is relevant competition to CMT’s properties. 

With new malls seeing strong pre-commitments ahead of completion, we believe that risks to CMT’s earnings has also minimised. 

Potential Catalyst: Better-than-expected Reversions or Acquisitions

Expectations for CMT are low, with most investors not anticipating any rental reversion growth, in our view. The recent uptick in retail sales, if sustained, could mean that downside to rental reversions is likely to be minimal and result in a share price re-rating. 

The utilisation of its balance sheet to fund acquisitions (e.g. sponsor's 70% stake in West Gate) might present an upside surprise to our estimates. 

Valuation

• Maintain Target Price at S$2.30 as we roll forward valuations. The stock offers an FY18F DPU yield of 5.5% and total potential return in excess of 10%. 

Key Risks to Our View

• More aggressive rate hikes than consensus expectations may cause ripples in the market. Being a proxy for interest-rate investment, CMT may then suffer from selling pressures. 

CapitaLand Mall Trust's 2Q18 Results in Line 

CapitaLand Mall Trust (CMT) reported an improved set of operating results, which we believe will be well received by investors. 2Q18 DPU came in at 2.81 Scts (a 2.2% improvement y-o-y and 1.0% q-o-q). 

On 1H18 basis, DPU came in at 2.0% y-o-y to 5.59 Scts, forming 50% of our forecasts. The better 1H18 distributions were driven by an organic improvement with a 1.7% and 3.7% rise in gross revenues and net property income to S$346.5m and S$246.4m respectively.

Gearing inches down

Portfolio valuations firmed up slightly on the back of a 10-15bps compression in cap rates (ranging from 4.7-5.2% as of 1H18), largely driven by valuers’ assessment of market values achieved in the retail space. Therefore, NAV increased slightly to S$1.99/unit, while gearing dipped to 31.5%.

Operations are bottoming out; tweaking estimates higher.

Strong rental income from its major malls (Plaza Singapura, Bedok Mall, Bugis Junction and Tampines Mall) which more than offset lower revenues at Jcube and Bukit Panjang Plaza and the income vacuum from the sale of Sembawang Shopping Centre in June 2018.

1H18 portfolio rental reversions came in at +0.8% (1Q18 +0.8%); which we see as an emerging sign of dissipating risk of further pressures in the retail scene.

While rental reversions at selected assets remained negative, we understand that it was largely due to the ongoing tenant remixing strategies. We however note a q- o-q improvement at Westgate (-2.1% in 1H18, -3.3% in 1Q18).

Portfolio retention rate remained steady at 83.8% (82.9% in 1Q18) while occupancy rates remain at a sustained high level at close to 100%.

Selected assets saw a slight dip in occupancy rates (Clarke Quay saw an 8-ppt q-o-q drop in occupancy rates to 90.4% but is likely to be transitionary in nature.

Proceeds from the sale of Sembawang Shopping Centre in June 2018 will be used to pay down debt, thus resulting in net savings for the REIT. Our estimates are thus raised slightly to account for

1. interest savings, and
2. slightly improved operational numbers for a number of retail assets across the portfolio.

AEI at Westgate to improve traffic flow; a potential low-hanging opportunity for acquisition.

The manager plans to start AEI at Westgate and hopes to improve shopper accessibility to the mall; it is more defensive in nature and aims to redirect traffic flow across the mall. Capex spent is expected to be minimal at < S$10m. The manager is continuing to re-look at its current tenant mix to improve the trading performance.

With property seeing increasing stability in operations, we believe that the manager might look to acquire the remaining 70% from the sponsor (valued at S$675m) in the medium term.

With gearing reaching at a low of 31.5% post the sale of Sembawang Shopping Centre and portfolio revaluations, the REIT has ample headroom to acquire the property.

Source: DBS Research - 23 Jul 2018