In Line, Maintain HOLD

• CAPITALAND MALL TRUST (SGX:C38U) reported in-line (MKE & consensus) 2Q19 DPU of SGD2.92cts, +3.9% y-o-y with the contribution from its Westgate deal and Funan’s reopening.
• Looking ahead however, we expect to see a drag on tenant sales across its larger AUM given the weak retail sales outlook.
• We think that CapitaLand Mall Trust’s valuations will likely be supported by its scale and trading liquidity within the S-REITs space. But with the lack of near-term growth catalysts and no clear acquisition strategy, we stay at HOLD.
• Our forecasts are unchanged, but we raised our DDM-based Target Price to SGD2.60 (COE: 6.1%, LTG: 1.5%) as we lower our risk-free rate assumption to 2.5%.

Growth Supported by Westgate Acquisition

• CapitaLand Mall Trust's 2Q19 revenue rose 10.6% y-o-y while NPI was up 10.3% y-o-y, driven by a 100% contribution from Westgate; its remaining 70% interest was acquired in 4Q18.
• Portfolio occupancy dipped slightly q-o-q from 98.8% to 98.3%, due to IMM (down from 97.9% to 96.1%), Clarke Quay (96.9% to 94.0%) and Bedok Mall (99.6% to 98.9%).
• Rental reversion improved to +1.8% for 1H19, from +1.2% in 1Q19 with stronger results at IMM (+4.2%), Lot One (+5.6%) and Westgate (+4.3%).
• While shopper traffic improved at 1.9% y-o-y (vs +2.0% y-o-y in 1Q19), tenant sales were down 0.9% y-o-y (was - 0.4% y-o-y in 1Q19), in line with the weak retail sector outlook, which we expect to persist in the medium term. Tenant sales growth was led by its sporting goods (+8.5% y-o-y), jewellery and watches (+3.8%), and F&B (+3.5%) segments, which offset weaker home furnishings (-22.4%), IT & telecommunications (-12.9%), and electrical & electronics (-9.8%).

Funan Contribution Already Factored in

• CapitaLand Mall Trust's AUM valuation rose 496.1% blended occupancy. The AUM uplift was likely due to improving NPI, as cap rates were unchanged at 4.40-7.00% across its portfolio.
• Meanwhile CapitaLand Mall Trust will embark on a SGD15- 20m AEI at Lot One from the library the cinema.

Sound Balance Sheet; Acquisitions a Wild-card

• CapitaLand Mall Trust's balance 15-year average and suggests SGD1.8-2.8b local and overseas management, while Jewel is a view.

Source: Maybank Kim Eng Research - 23 Jul 2019