• CapitaLand Mall Trust’s 2Q19 DPU of 2.92 S cents (+3.9% y-o-y) is in line with our expectations. It maintained positive rental reversion at 1.8%.
• Westgate contributed the bulk of y-o-y growth in gross revenue. The successful reopening of Funan in June, with committed occupancy at 95% for retail space and 98% for office space, augurs well for outlook in 2H19. We estimate Funan to contribute rental income of S$16.5m in 4Q19, representing 8% of total gross revenue.
• Maintain HOLD. Target price: S$2.65. Entry price: S$2.42.

2q19 Results

• CAPITALAND MALL TRUST (SGX:C38U) reported 2Q19 DPU of 2.92 S cents, up 3.9% y-o-y, bringing 1H19 DPU to 5.80 S cents (+3.8% y-o-y). Results were in line with our 2Q19 DPU forecast of 2.88 cents.

Westgate contributed significantly to yoy growth.

• Gross revenue and NPI increased 10.6% and 10.2% y-o-y respectively. The improvement in gross revenue was mainly due to the completion of the acquisition of the remaining 70% stake in Westgate on 1 Nov 18, which contributed S$18.4m to gross revenue.
• Funan reopened on 28 Jun 19 after a 3-year redevelopment and contributed S$0.9m to gross revenue. Funan achieved occupancy of 96.1% as of Jun 19 (retail: 95%, office: 98%).

Maintained positive rental reversion.

• Occupancy was stable at 98.3% as at Jun 19 (Mar 19: 98.8%). CapitaLand Mall Trust achieved positive rental reversion of 1.8% on a portfolio basis in 2Q19. Major contributors were IMM Building (+4.2%), Lot One Shoppers’ Mall (+5.6%) and Westgate (+4.3%). Retention rate was healthy at 86.3%. Shopper traffic grew 1.9% y-o-y.

Steady increase in capital values.

• CapitaLand Mall Trust recognised change in fair value of S$119.8m (Junction 8: S$39m, Plaza Singapura: S$14m, Bugis Junction: S$11m). The higher valuations were mainly due to higher rentals with cap rates stable at 4.85% for retail space and 4.0% for office space.
• Funan was reclassified from development to investment properties and valuation on its book increased from S$360m to S$751m (further upside from two underground links to City Hall MRT station and The Adelphi, which would be completed in 2021). NAV/share has increased 1.5% q-o-q to S$2.04.

Stock Impact

Less supply-side pressure.

• The Singapore economy has retail space 2020-21.

Full-year contribution from Funan in 2020.

• Funan’s retail NLA of 325,000sf is 95% pre-committed. Funan’s two grade-A office blocks with NLA of 214,000sf are 98% pre-committed (key tenants are three government agencies - Attorney General’s Chambers, Department of Statistics and Smart Nation & Digital Government Office, and co-working operator WeWork).
• Management expects Funan to provide yield-on-cost of 5%. We estimate Funan to contribute rental income of S$16.5m in 4Q19, representing 8% of total gross revenue.

Committed to continuous enhancements.

• CapitaLand Mall Trust will embark on asset cinema to house smaller screens. Management expects ROI at low-single-digit for the AEI.

Short-term cannibalisation from Jewel Changi Airport.

• Tampines Mall suffered high-single-digit drop while Bedok Mall endured low-single-digit drop in shopper traffic during the first week after the launch of Jewel Changi Airport. Consumer behaviour has gradually normalised. Management expects Jewel’s novelty effect to wear off over time.

On the lookout for acquisitions.

• CapitaLand Mall Trust is open to acquisitions both locally and overseas. Management is keen to explore the acquisition of Jewel Changi Airport when occupancy has stabilised.
• For overseas sponsor CapitaLand on the ground.

Positive ramification from Masterplan 2019.

• Management is conducting a detailed study of authorities.

Earnings Revision / Risk

• We maintain our earnings forecasts.

Valuation / Recommendation

Maintain HOLD.

• Our target price of S$2.65 is based on DDM (required rate of return: 6.5%, terminal growth: 1.5%). Entry price is S$2.42.

Share Price Catalyst

• Positive newsflow on retail rentals and mall occupancy.
• Asset enhancement initiatives.

Source: UOB Kay Hian Research - 24 Jul 2019