• Improving portfolio metrics not priced in as CapitaLand Mall Trust (SGX:C38U) is poised to surprise on the upside.
• Portfolio of dominant retail malls to lead recovery; centrally located malls will benefit as more workers return to offices.
• Attractive P/NAV of 1.0x; yield gap differential to peers too wide to ignore.

CapitaLand Mall Trust - Time for a Relook

Relative underperformance an opportunity for investors to accumulate.

• CapitaLand Mall Trust's share price weakness YTD, lagging both the large cap S-REITs and pure-play suburban retail peers, is noteworthy. Since the start of the year, CapitaLand Mall Trust's share price is now down about 20%, while the top 10 S-REITs by market cap are now on average back to the prices at the beginning of the year.
• While investors may attribute this underperformance to the extended timeline of its proposed merger with CapitaLand Commercial Trust (SGX:C61U), with the proposed merger expected to complete by Nov 2020, we see this overhang dissipating over time. Post proposed merger with CapitaLand Commercial Trust, the combined entity, CapitaLand Integrated Commercial Trust (CICT), will be Singapore’s largest S-REIT with a potential market capitalisation of S$12.7bn.
• Given its significant scale in terms of AUM and market capitalisation, we believe that CICT will continue to remain one of the key S-REITs to invest in.

How Does CapitaLand Mall Trust's Share Price Performance Compare?

• In terms of absolute price performance, CapitaLand Mall Trust has underperformed the pure play retail S-REITs and large cap peers by 17% and 20% respectively.
• CapitaLand Mall Trust is trading close to the diversified S-REIT peers (Suntec REIT (SGX:T82U) and Mapletree Commercial Trust (SGX:N2IU)), which we believe investors will be comparing against post the proposed merger.
• We believe that this underperformance is unwarranted given its diversified portfolio coupled with dominant properties in the respective submarkets of office and retail in Singapore.
• Over time, we expect CICT to reclaim its premium over peers as it restarts its growth engines post the COVID-19 pandemic to deliver higher distributions to unitholders.

Value at Current Prices

Attractive entry points.

• As a retail REIT, we believe that CapitaLand Mall Trust trades at an attractive P/NAV of 1.0x, which is close to 25% below its pure play suburban retail peer which is trading at 1.25x P/NAV.

Widening yield gap between CapitaLand Mall Trust and its peers.

• CapitaLand Mall Trust trades at an average 0.2% yield discount to its retail peers based on 5-year historical figures. This yield differential has widened to above 1.2%, which is beyond the +1 standard deviation level since Jun 2019. We think that the present yield differential gap is too wide to be ignored and puts CapitaLand Mall Trust at a better value at its current trading price.
• As the worst looks to be over, we urge investors to look beyond the near-term weakness to ride on CapitaLand Mall Trust’s operational recovery. We anticipate DPU to recover 22% y-o-y to 12.1 Scts in FY21, with potential upside post consolidation with CapitaLand Commercial Trust.

What’s Next to Look Out For?

CapitaLand Mall Trust’s suburban malls continue to see improving traffic.

• CapitaLand Mall Trust’s suburban retail malls are dominant given their location near/on-top of transportation nodes which have been prime beneficiaries in the recent weeks. These malls contribute 52% of total revenues. This is evidenced in the strong rebound in traffic to 82% and 73% of pre-COVID levels for IMM and Plaza Singapura/The Atrium, which is a positive sign that its retailers are likely to see a turn around in performance in the coming months.
• In the coming months, we anticipate a further broadening of the recovery to its other more centrally located malls like Raffles City Shopping Centre and Plaza Singapura. Though these malls are dependent on office workers returning to work, with a gradual relaxation of the current work-from-home advisory, we believe that overall portfolio metrics will likely remain on an uptrend.

Trades within the “essential service” sector.

• We estimate that approximately 43% of retail tenants are within the food & beverage and beauty & health trade segments which we think will lead the recovery curve, as consumers head back to the malls for their meals and shopping activities. Even department stores (c.24% of revenues) are seeing fairly brisk sales in recent weeks given the combined marketing efforts between CapitaLand Mall Trust and retailers to drive consumer spending.
• Slower rebound in Clarke Quay, which we consider a higher risk asset within CapitaLand Mall Trust’s portfolio due to a large exposure to entertainment tenants, will likely remain quiet until phase 3 of post-Circuit Breaker when entertainment tenants will be allowed to resume operations. While more assistance is needed in the near term, overall revenue contribution is estimated to be < 11% for the property and will be further diluted over time, post the proposed merger with CapitaLand Commercial Trust.

Recapturing its premium over time.

• At the current price, CapitaLand Mall Trust trades at 0.95x P/NAV and prospective yields of 5.7% (based on proforma estimates). This is at a discount to Mapletree Commercial Trust which is at 1.15x P/NAV with prospective yield of 5.0%, a level which we see compressing over time.
• Given its scale and centrally located portfolio and its AUM split between retail (33%), integrated developments (29%) and office (38%), we believe that CICT will over time, trade at a premium to its diversified peers, and closer to Mapletree Commercial Trust, which we see as having the most similar metrics and exposure. In addition, given its market cap and CICT’s more diversified tenant and earnings base, we believe that the REIT deserves to trade at a premium over time.

Source: DBS Research - 9 Sep 2020