Recovery Off to a Slow Start, 6.0% Dividend Yield

• CapitaLand Mall Trust (SGX:C38U)’s 2Q20 DPU was down 27.7% y-o-y, as it retained a balance SGD46.4m of distributable income from 1Q20, after releasing SGD23.2m in the quarter.
• Shopper traffic has returned since the start of Singapore’s phase 2 reopening and is set to rise further with relaxation measures, even as tenant sales recovery lacks visibility. The additional rent waiver lowers our FY20 DPU by 5%, but with fundamentals improving, we see a further release of its retained taxable income in 2H.
• CapitaLand Mall Trust's valuations are undemanding at 6.0% FY21 yield and 1.0x P/B. Its balance sheet remains strong with a low 34.4% leverage, 4.2x interest cover, and SGD2.9-4.4b in debt headroom.
• Maintain BUY with a DDM-based Target Price of SGD2.35 (COE: 6.3%, LTG: 1.5%).

Lower Occupancies, Rental Reversion at +0.1%

• CapitaLand Mall Trust's 2Q20 revenue fell 39.8% y-o-y, 44.2% q-o-q and NPI decreased 48.9% y-o-y, 54.1% q-o-q with lower gross rental income arising from rental waivers of SGD74.1m granted to tenants during Singapore’s circuit breaker period.
• Portfolio occupancy fell from 98.5% to 97.7% with weaker occupancies at both its
  • downtown assets - Clarke Quay (95.9% to 92.3%), Raffles City (98.5% to 97.6%), Atrium @ Orchard (98.5% to 97.4%), and
  • suburban malls - IMM (99.4% to 98.2%), Bedok Mall (98.8% to 96.9%), and Lot One (98.4% to 97.6%).
• Rental reversion was at +0.1% for 1H20 (vs +1.6% in 1Q20, with a mixed performance across its portfolio. We expect Clarke Quay to remain a drag in the near term.

A Better 2H, Slower FY20-21E Growth

• Shopper traffic in 1H20 declined 40.6% y-o-y and tenants’ sales fell 15.4% y-o-y, while supermarkets remained the only bright spot with sales up 18.6% y-o-y. Weekly shopper traffic to its malls since 19 Jun jumped 65% w-o-w and then 48% w-o-w to 53% of Jan 2020 levels.
• We expect its suburban malls to be more resilient in terms of both occupancy and rental reversion in 2H as recovery at its downtown assets remains challenged by the absence of international tourists. We believe rental growth is likely to be slow as management looks to restructure its leases, to receiving higher GTO rent (currently 5%) and rental instalment plans.

Source: Maybank Kim Eng Research - 22 Jul 2020