• Proposed acquisition of remaining 70% stake in Westgate for S$805.5m (post-transaction cost yield of 4.3%) a sweet deal for CMT.
• Coupled with the relaunch of Funan, CMT is set to take a multi-year growth path.
• Offering stability with growth, the prospects of record DPUs in FY19F-20F could trigger a re-rating of its share price.
• Target price raised to S$2.45; Maintain BUY.

Target Price Raised to S$2.45 as CMT Returns to Growth!

• Anchored by resilient yields, CapitaLand Mall Trust (CMT) has been a safe harbour for investors and is starting to emerge as a growth play. As the retail sector bottoms out, 2019 could be a chance for CMT to shine as full contributions from Westgate and the return of Funan takes DPU back on a multi-year growth path.
• CMT’s share price should re-rate as earnings growth returns to an upward trajectory of 4% p.a. (vs SREIT’s average of 2%). 
• We have raised our Target Price for CapitaLand Mall Trust (CMT) to S$2.45 to reflect the higher growth outlook and earnings base. Maintain BUY!

Where We Differ: Deep Dive Into Micro-markets Gives Us Confidence That CMT Can Surprise on the Upside

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 is not a big threat to CapitaLand Mall Trust (CMT) given strong pre-commitments ahead of completion. 

Meanwhile, higher contributions from Westgate and Funan will help drive up DPUs in a sustained manner. Our deep dive into Westgate also gives us confidence that the worst is over for the mall – rents appear to be bottoming out, offering upside to reversions as they fall due. 

Potential Catalyst: Better-than-expected Reversions or Acquisitions

Expectations for CapitaLand Mall Trust (CMT) are low, as investors are barely 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 may trigger a re-rating of its share price. 

The utilisation of its balance sheet to fund further acquisitions also offers an upside surprise to our estimates. 

Valuation: 

Maintain BUY with higher Target Price of S$2.45 after raising estimates to reflect the higher growth outlook. 

At current CapitaLand Mall Trust (CMT) share price, the stock offers FY19F DPU yield of 5.5% and total potential return in excess of 20%. 

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 pressure. 

What's New - Ushering a New Era of Growth, Starting With Westgate

A new leader emerging in the West.

On 27 Aug 2018, CapitaLand Mall Trust (CMT) proposed the acquisition of the remaining 70% stake in Westgate - an iconic retail development which enjoys direct connectivity to both Jurong East MRT Station and bus interchange - from the Sponsor for S$789.6m (or S$805.5m including acquisition-related expenses).

With the merits of the proposed acquisition extending beyond immediate DPU accretion, we believe the timing (just as rents are showing signs of bottoming) is right and price is fair. If the deal goes ahead, it would solidify CMT’s leadership position within the Jurong Regional Centre subzone with a 56% share vs 41% previously.

The post-transaction cost yield of 4.3% also reflects CMT’s strength in capital recycling, as it redeploys capital from the sale of Sembawang Shopping Centre which we estimate was divested at an exit yield of less than 3%.

Tighter yield at the outset but strong growth potential awaits.

In April 2017, Jurong Point was sold to Mercatus Co-operative for S$2.2 bn. On a NLA basis, the consideration for Westgate works out to S$2,746 psf, which represents an 18% discount to the S$3,343 psf for Jurong Point. While NPI yield of 4.3% appears tight at first glance, we believe that it is reflective of current market transactions and offers upside if strategies to increase rents and extract further synergies are executed successfully.

Additionally, we note that Westgate is a relatively young mall offering greater long-term growth potential supported by company-specific drivers and positive demographic trends. We discuss this in a later section.

Good things come in pairs; Westgate acquisition and Funan re-launch to lead resurgence of growth.

After flattish NPI and DPU growth profiles over the last two years, an exciting 2019 awaits. Apart from incremental contributions from the Westgate acquisition in 1H19, Funan, which has been closed for redevelopment since 2H16, is set to return in 2H19 (ahead of initial expectations). To date, CMT has achieved a respectable commitment rate of 50% for Funan’s retail wing and aims to achieve 80% by end-2018.

With full contributions from Westgate and a revitalised Funan coming back onboard, CMT is set on a firm growth path. We PI growing at 5.8% CAGR to S$566.4m by FY20F.

DPUs to Reach New Highs in FY19F-20F?

Our base case assumes that the Westgate acquisition will be 80% debt- funded and estimate that the deal will be DPU-accretive – boosting FY19F DPU by 0.2 Scts (+1.8% vs FY17).

The re-launch of Funan could add an additional 0.3 Scts and 0.7 Scts to DPU in FY19F and FY20F, respectively, anchoring robust DPU growth of 2.8% CAGR over FY17-20F.

Maintain BUY; Target Price Raised to S$2.45

Maintain BUY; Target Price raised to S$2.45 as we lift our FY19F-20F NPI projections for CMT to capture the immediate accretion from the remaining 70% share of Westgate and higher contributions from Funan, which has been enjoying good take- up rates and poised for an earlier relaunch. This translates into 4%/5% boost in DPU in FY19F/20F to 11.7 Scts and 12.1 Scts respectively.

Our Target Price implies FY20F yield of 5% (+1SD of its historical range since 2010), which seems fair in our opinion given

1. the bottoming out of the retail sector, and
2. clear company-specific growth catalysts over F18F-20F which could allow CMT to outperform peers.

Source: DBS Research - 10 Sep 2018