UOB Kay Hian upgrades CapitaLand Integrated Commercial Trust to ‘buy’ with TP of $2.14

UOB Kay Hian analyst Jonathan Koh's upgrade comes on the back of CICT’s positive performance for the 3QFY2022 ended Sept 30.

UOB Kay Hian analyst Jonathan Koh has upgraded his call for CapitaLand Integrated Commercial Trust (CICT) to “buy” with a target price (TP) of $2.14 from $2.17 previously.

The upgrade comes on the back of CICT’s positive performance for the 3QFY2022 ended Sept 30 .

On Oct 21, the REIT reported increases in gross revenue and net property income (NPI) of 13.7% and 12.7% y-o-y respectively, which came in line with Koh’s expectations.

In his report dated Oct 26, Koh has trimmed his 2022 distribution per unit (DPU) forecast by 3.5% as new office tenants will only contribute to cash flow starting Jan 23, 2023 after the fit-out period. His 2023 DPU has also been marginally reduced by 0.6% to 11.6 cents.

Koh’s TP of $2.14 is based on a dividend discount model that features a 7.25% cost of equity and terminal growth of 2.0%. He believes CICT provides an attractive 2023 distribution yield of 6.7%.

Koh notes that Singapore’s reopening has been a boon especially for downtown malls, which swung to a positive rental reversion of 3.8% in 3QFY2022. “CICT’s retail portfolio recorded positive rental reversion of 0.6% in 9MFY2022. We estimate that rental reversion was positive at 2.9% for suburban malls and 3.8% for downtown malls in 3QFY2022,” says Koh.

Meanwhile, retail occupancy also improved slightly by 0.3 percentage points (ppt) q-o-q to 96.8%. Downtown malls experienced stronger growth in tenant sales of 36.5% y-o-y compared to an increase of 10.7% y-o-y for suburban malls, but the latter experienced a stronger positive rental reversion of 1.8% compared to downtown malls’ decrease of 0.3% for 9MFY2022, he notes.

“Management disclosed that tenant sales for suburban malls are already 5% above pre-pandemic levels, while that of downtown malls are on the verge of climbing above pre-pandemic levels,” the analyst adds.

CICT’s Singapore office portfolio has also maintained its positive momentum, with occupancy improving 3.1ppt q-o-q to 96.0% and a positive rental reversion of 7.9% in 9MFY2022. “Occupancy at Capital Tower has improved by 13.6ppt q-o-q to 90.7% after CICT secured ByteDance to backfill 120,000 sq ft of office space vacated by JPMorgan,” he points out, adding that office occupancy improved 2.2ppt q-o-q to 94.1% on a group-wide basis.

Koh notes that according to CBRE, office rents for Grade A core central business district (CBD) increased 8.9% y-o-y and 2.7% q-o-q to $11.60psf/month in 3QFY2022. This is the sixth consecutive quarter of sequential growth, and office rents have surpassed the pre-pandemic peak of $11.55psf/month set in 4QFY2019.

The analyst says CICT management will adopt a “disciplined and prudent” approach towards acquisitions, cognisant of difficulties in raising funds through the equity market. “As widely reported in the mass media, CICT is bidding to acquire the Mercatus Portfolio, which comprises three suburban malls — Nex, Thomson Plaza (strata title) and Jurong Point (strata title),” he says.

“Management did not comment on the outcome of bidding but emphasised that CICT will adopt a prudent and patient approach towards acquisitions. The cost of capital is elevated given the uncertain macroeconomic environment,” notes Koh, adding that CICT’s ability to acquire is currently hampered by difficulties in raising funds through the equity market.

The way he sees it, CICT’s integrated developments will provide resiliency and diversification, with committed occupancy for integrated developments remaining stable at 97.5% in 3QFY2022, while its “resilient” balance sheet will be able to weather external uncertainties.

CICT’s aggregate leverage increased slightly by 0.6ppt q-o-q to 41.2% in 3QFY2022, while the cost of debt saw a slight uptick of 0.1ppt q-o-q to 2.5%. Average term to maturity eased by 0.3 years to 4.1 years and 80% of its borrowings are hedged to fixed interest rates. “Management estimated that every 1% increase in interest rates will raise annual interest expense by $20 million and reduce DPU by 0.3 cents per year,” he adds.

Share price catalysts to Koh’s valuation include the steady recovery in shopper traffic and tenant sales due to easing of social distancing measures, asset enhancement and the redevelopment of existing properties and a positive outlook for the office sector with limited supply and healthy pre-commitments within the core CBD.

As at 3.25pm, shares in CICT were trading 1 cent or 0.53% up at $1.91.

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