RHB upgrades CICT to 'buy' following 3QFY2022 update, Citi keeps 'buy'

Felicia Tan
4-min read

RHB Group Research and Citi Research have given CICT TPs of $2 and $2.35 respectively.

Analysts from RHB Group Research and Citi Research are positive on CapitaLand Integrated Commercial Trust’s prospects after the REIT released its update for the 3QFY2022 ended Sept 30 on Oct 21.

RHB analyst Vijay Natarajan has upgraded his recommendation to “buy” as he sees value emerging amid the current market selloff.

CICT’s unit price fell some 16% in the last month, the analyst points out. “While volatility should persist in the near term, we see [CICT’s] current [unit] price level as a good entry point for the long term,” he writes.

In his report dated Oct 25, Natarajan notes several positives from CICT’s 3Q business update, attributing it to the “positive levers” from the reopening.

In the 3QFY2022, CICT reported a 13.7% y-o-y increase in its gross revenue of $374.1 million. At the same time, its net property income (NPI) rose 12.7% y-o-y to $273.3 million.

The y-o-y increase in NPI was due to the new acquisitions made by the REIT manager, as well as higher revenue on gross turnover.

However, the analysis notes that the analyst notes that the growth was offset by an increase in utility expenses, which saw CICT’s NPI margin reduce by one percentage point y-o-y to 73% in the 3QFY2022. Most of CICT’s utility hedges expired in the 2QFY2022, he adds.

“CICT will be gradually rolling out higher service charges [which is expected to boost its revenue by around 1%-2%] to offset rising costs and mitigate inflationary pressures,” Natarajan writes. “Four key assets (CapitaSpring, Six Battery Road, Capital Tower and Asia Square Tower 2) will also see a significant cash flow increase starting FY2023 as [around] 15% of the committed occupancy at these assets is expected to start fully contributing.”

The REIT’s operating metrics also improved across the board with portfolio occupancy rising 1.3 percentage points q-o-q to 95.1%. The higher occupancy was driven largely by CICT’s Singapore portfolio which rose 3.1% percentage points q-o-q to 96%. CICT’s retail and integrated portfolio also registered slight improvements during the 3QFY2022.

Further to his report, Natarajan notes that asset recycling is likely to happen with limited inorganic growth potential.

As at Sept 30, CICT’s gearing is at 41.2%, which is on the higher end of the regulatory limit of 50%. However, its portfolio asset is expected to “hold firm”, which should not impact its gearing adversely, the analyst says.

“Overall cost of debt rose 10 basis points (bps) q-o-q to 2.5%, and [around] 80% of its debt is currently hedged, with every 100 bps increase in rates impacting [CICT’s] distribution per unit (DPU) by -3%,” he writes. “About 12% and 17% of its debt is due for expiry in FY2023-FY2024, which is likely to be rolled over with a 100-150 bps increase in finance costs.”

On the back of higher finance costs and moderated rent growth assumptions, Natarajan has lowered his DPU estimates for the FY2023 to FY2024 by 3%-4%.

Despite the recommendation upgrade, Natarajan has lowered his target price to $2 from $2.30. The lower target price is due to a higher cost of equity (COE) assumption of 50 bps at 7.4% amid a sharp increase in rates assumptions.

To this end, the analyst remains “cautiously optimistic” on his outlook for the FY2023, with additional cash flow expected from its committed leases.

Regarding environmental, social and governance (ESG) ratings, CICT has one of the highest scores among the Singapore REITs (S-REITs) at 3.3 out of 4.0.

“This is three notches above the country median, and thus we apply a 6% ESG premium,” Natarajan writes.

Citi analyst Brandon Lee has kept “buy” on CICT with an unchanged target price of $2.35.

To him, the REIT’s “well-executed acquisitions” in the 1HFY2022 and partial pick-up in retail gross turnover (GTO) rental has underpinned its performance in the 3QFY2022.

During the quarter, CICT registered improving retail performance all-around for the 3QFY2022, which may help to mitigate an impending slowdown in the office sector as the economy slows, says Lee.

Even as units in CICT have outperformed the S-REITs sector overall, Lee believes that the counter is under-valued at its existing P/B of 0.82x versus its 1.17x mean.

In his report dated Oct 21, Lee sees a slightly positive impact to CICT’s unit price in view of improvements in both its retail and office metrics.

As at 12.15pm, units in CICT are trading 9 cents higher or 5.17% up at $1.83.

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