• NEUTRAL, SGD2.38 Target Price implies 10% downside with 5% FY20F yield. See Capitaland Mall Trust Share Price; Capitaland Mall Trust Dividend History.
• CAPITALAND MALL TRUST (SGX:C38U)'s 3Q19/9M19 results are in line, with DPU up 4.8% y-o-y, mainly driven by contributions from Funan and Westgate. Operational performance (3Q19) was mixed, with slight occupancy improvement but shopper traffic, tenant sales and rental reversions dropped y-o-y.
• Market outlook remains challenging, with retail sales remaining sluggish but partly mitigated by a lower supply of retail space.
• Valuations are fair, and the stock is well-supported by investors’ continued appetite for yield instruments.

Slight Improvement in Occupancy Rate But Rental Reversion and Shopper Traffic Declined in 3Q19

• CapitaLand Mall Trust’s occupancy rate improved by 0.6ppt q-o-q to 98.9% on occupancy improvements in Funan, Bedok Mall, Bugis Junction, Westgate and International Merchandising Mart Mall (IMM). However rental reversion for 3Q was at -1.7% based on our calculation (YTD: +1.2%), on top of y-o-y declines in tenant sales and shopper traffic – which reflect the overall slowdown in demand for retail space. See Capitaland Mall Trust Announcements.
• About 2.4%/26% of leases (by gross rental income) are due for renewal in 4Q19/2020, for which we expect flattish rental reversions.

Retail Sales Continued to Trend Down

• Retail sales (y-o-y) fell for the seventh consecutive month in August, and have declined 2.6% YTD, on cautious consumer demand in light of the slowdown in the economy. The outlook remains lacklustre, with consumer sentiment staying weak.
• The weak demand, however, was partially mitigated by the minimal supply threat (~0.3m sqf until 2021, vs 1.3m sqf in 2019) after the opening of three big malls – Jewel Changi Airport (Jewel), Funan and Paya Lebar Quarter (PLQ) mall this year.

Gearing Is Comfortable at 34%; Acquisitions and Divestments Are Likely in the Near Term

• Management earlier noted that Singapore will remain its preferred market, but is open to overseas opportunities where the sponsor has a strong presence. We believe Jewel is a possible acquisition candidate for CapitaLand Mall Trust in the near term, considering its strong location and brand presence.
• We also believe CapitaLand Mall Trust may divest its office component in Funan to CAPITALAND COMMERCIAL TRUST (SGX:C61U) in the next one year.
• Asset enhancement works are progressing in Lot One Shopper’s Mall, with an estimated capex of SGD15-20m – and are expected to be completed by 2H20. Besides this, it has also identified four malls that it believes has development potential, based on Urban Redevelopment Authority’s draft master plan.

Source: RHB Invest Research - 22 Oct 2019