CapitaLand Mall Trust's 3Q20 in Line, Undemanding Valuations

• CapitaLand Mall Trust (SGX:C38U)’s 3Q20 DPU rose 1.3% y-o-y and jumped 46.9% q-o-q with an easing off of rental waivers. Its tenants’ sales have gained traction in the Phase 2 reopening and should underpin the recovery of its suburban assets. This, together with its scale, will help cushion CapitaLand Mall Trust's FY21-22 DPUs against necessary tenant remixing at Raffles City and Clarke Quay in the near term.
• The results were in-line (with consensus, MKE), and we maintain our forecasts and DDM-based S$2.35 Target Price (COE: 6.5%, LTG: 1.5%).
• CapitaLand Mall Trust's valuations are undemanding at 6.3% FY21 yield and 0.9x P/B. Its balance sheet remains strong with low 34.4% leverage and SGD2.7-4.1b in debt headroom. BUY.

Suburban Malls Leading Recovery

• CapitaLand Mall Trust's 3Q20 revenue fell 25.3% y-o-y but rose 31.7% q-o-q while NPI was down 27.6% y-o-y but jumped 53.5% q-o-q as rental waivers eased to SGD29.5m (from SGD74.1m in 2Q20).
• CapitaLand Mall Trust's portfolio occupancy improved q-o-q from 97.7% to 98.0%, driven by its suburban malls, with Tampines and Junction 8 at 100.0%, IMM (from 98.2% to 98.8%), Lot One (97.6% to 99.2%), Bedok Mall (96.9% to 97.6%) and JCube/ Bukit Panjang Plaza (95.4% to 96.8%), while occupancies were weaker at Funan (99.2% to 98.7%), Plaza SG (99.3% to 98.3%), and Raffles City (97.6% to 97.1%).
• Portfolio rental reversion was - 4.4% versus +0.1% for 1H20, with weaker reversions also attributed to its downtown assets - Funan (-4.2%), Bugis Junction (-6.4%), Bugis+ (-4.7%).

Tenant Sales Growth Gaining Traction

• While shopper traffic fell 40.4% y-o-y in 3Q20 and remained stable since Phase 2’s reopening, tenants’ sales have returned to 89% of pre-Covid levels, versus 85% in 1H20, led by stronger demand for home furnishings, sporting goods, electronical & electronics, and jewellery & watches, which grew 2-16% y-o-y.
• Supermarket sales softened -7.1% y-o-y, but still improved +9.6% y-o-y for 9M20.

Rental Outlook Weak, Tenant Rejig in the Works

• Management has seen additional leasing interest from F&B but expects most other tenants to hold off expansion plans until 2021-22.
• With 29.0- 33.6% of its leases expiring in FY21-22, we have pencilled in weaker occupancies and -15-20% y-o-y in rents for CapitaLand Mall Trust's downtown malls and -5% y-o-y for its suburban properties. We expect both Raffles City and Clarke Quay to remain a drag on NPI in the near term, as management looks to remodel their tenant mix over the next 12-24 months.

Source: Maybank Kim Eng Research - 22 Oct 2020