A recovery in tenant sales is not enough for CapitaLand Mall Trust

SINGAPORE (Jan 24): The manager of CapitaLand Mall Trust (CMT) on Wednesday announced that its 4Q18 DPU has risen by 3.1% y-o-y to 2.99 cents, bringing FY18 DPU to 11.50 cents, 3.0% higher y-o-y.

This came on the back of 4.7% y-o-y increase in gross revenue to $180.5 million and a 4.3% y-o-y increase in net property income to $124.4 million.

See: CapitaLand Mall Trust posts 3.1% increase in 4Q DPU to 2.99 cents

Following the results announcement, DBS Group Research is maintaining its “buy” call on CMT with a target price of $2.44.

In a Thursday report, analyst Carmen Tay says that CMY delivered yet another solid quarter, returning to growth in FY18, with the results coming in above her expectations.

“We also note the broad-based improvement in NPI across CMT’s portfolio malls, particularly for its suburban assets. Coupled with contributions from Westgate, they more than offset the income vacuum left by the sale of Sembawang Shopping Centre in June 2018,” says Tay.

“The quantum of portfolio rental reversions – at +0.7% for FY18 while unexciting at first glance, reflects sequential improvement. We believe that this is a positive signal that things are improving and that pressures in the retail space are bottoming out,” adds Tay.

Gearing levels rose to 34.2% in 4Q18 from 31.7% in the previous quarter, following the Westgate acquisitions, which was 65% debt funded. This is still within the research house’s target range. And while average cost of debt was stable at c.3.1%, the average term to maturity was shortened from 5.2 to 4.4 years.

The manager is cognisant of frictional impact on footfall post the launch of Jewel, but believes that malls within the Tampines cluster should remain resilient given defensive attributes. The worst is also over for Westgate, which led growth among CMT’s portfolio malls, and is set to fare better ahead as it emerges from the completion of its AEI and new concept launches.

On the other hand, Funan is poised for launch at the end of 2Q19 and is seeing improved leasing momentum, with about 80% commitments already.

“For FY19F-20F, we believe that incremental contributions from Westgate and the return of Funan would help accelerate CMT’s DPU growth momentum. Plans to take on selective AEI and redevelopment opportunities at lower-performing malls may provide further upside over the medium term,” says Tay.

Separately, Phillip Capital is keeping a “neutral” recommendation on CMT with a target price of $2.09.

Tenant sales saw a slight 0.5% y-o-y increase in FY18, with recovery in more trade categories this year, with the Food & Beverage, Fashion, and Beauty & Health categories turning around to clock in positive tenant sales growth.

The trust also managed to maintain a stable portfolio occupancy of 99.2% amid AEI works at Westgate and Tampines Mall.

However, on a portfolio basis, rental reversions barely moved a percentage point in FY18, despite the underlying recovery in tenant sales growth.

In addition, the trust’s balance sheet metrics seem to be deteriorating. Consolidation of debt from Infinity Mall Trust (which holds Westgate) has now resulted in a shorter term to maturity of 4.4 years and a higher leverage. Westgate has also now been pledged as collateral – all other assets are still unencumbered.

In a Thursday report, analyst Tara Wong believes that AEIs at Tampines Mall and Westgate could bring in higher footfall and tenant sales – and this is starting to be evident in the turnaround in rental reversions recorded in FY18.

Similarly, Maybank Kim Eng has a “hold” call on CMT with an increased target price of $2.25 from $2.20 previously.

In a Wednesday report, analyst Chua Su Tye says, “CMT has worked hard on its recycling efforts; Westgate deepens its long-term suburban footprint while a rejuvenated Funan should support DPUs. Retail sector fundamentals are still soft, with near-term demand-supply balance to be tested by Jewel’s opening in Mar 2019.”

CMT reported a +0.7% rental reversion for FY18, up slightly from +0.6% for 9M18, and versus -1.7% for FY17. Shopper traffic declined 0.9% y-o-y, while tenants' sales rose 0.5% YoY which was attributed to the stronger performances at its suburban malls.

Among the retail REITs, Maybank prefers Frasers Centrepoint Trust (FCT) given its strengthening suburban mall footprint, visible growth drivers, strong balance sheet and potential acquisition catalysts.

As at 12.25pm, units in CMT are trading 2 cents higher at $2.33 or 19.1 times FY19 earnings, with a distribution yield of 5.1%.