CapitaLand Mall Trust - Riding out pockets of weakness

■ Overall rental reversion was soft (about 3%), but positive

■ Occupancy rate likely bottoming, Bedok Mall to contribute from 4Q15

Reiterate Outperform (2) rating and TP of SGD2.21

What’s new:
CMT announced its 3Q15 results on 22 October, before market hours.

What’s the impact:
Revenue was in line, but net-property income (NPI) was 3% higher than our forecasts due to lower-than-expected operating expenses, which came from lower utility expenses. The YoY decline in revenue was no surprise due to ongoing refurbishment activity in IMM Building and Bukit Panjang Plaza as well as lower occupancy at JCube and Clarke Quay. These trends were evident in the previous quarterly results. The overall occupancy rate slipped QoQ from 98.8% to 96.8% due to higher vacancy rates in the above properties.

The stronger-than-expected DPU (8% higher than our forecast) was due to the release of the SGD8m retained in 1Q15. We regard this as a timing issue and it will not affect our full-year DPU forecast.

CMT disclosed that the portfolio’s YTD average rental reversion was 4.1%.This would imply a rental reversion of about 3% for 3Q15, based on our estimates. JCube was the only property to record negative rental reversion YTD (-14.1%). The implied increases (based on YTD data) in shopper traffic (+6.3% YoY) and tenant sales (+5.5% YoY) were relatively robust.

From 4Q15, CMT is slated to receive full quarterly contributions from Bedok Mall, acquired on 1 October 2015, and financed with a combination of bank borrowings and the issue of 72m consideration units (at an issue price of SGD1.9022) to the sponsor. It has already been incorporated into our forecasts. We are not making any changes to our DPU forecasts or 12- month target price of SGD2.21, pegged to our DDM valuation.

Technical Analysis
Daily Chart
What we recommend:
We reiterate our Outperform (2) rating as we believe CMT’s portfolio is near the bottom of the cycle (in terms of occupancy rate) and its capacity to withstand pockets of weakness (such as its properties in Jurong East) and continue to deliver overall positive rental reversions and stable DPUs is probably underappreciated by the market. A risk to our call would be negative rental reversions in coming quarters.

How we differ:
Our positive rating and target price for CMT do not differ much from the Bloomberg consensus, but our preference for retail S-REITs (for their defensive qualities and undemanding valuations) could be nonconsensus. Please prefer to our sector report, Staying positive on retail, 28 August 2015. (Read Report)

Read Related Reports
1) CapitaLand Mall Trust - 9M15 in line; +4.4% growth in tenant sales but subdued rent reversions by Credit Suisse Asia Pacific Equity Research, published on 23 October 2015

2) CapitaLand Mall Trust - Encouraged By Higher Traffic Flow & Tenant Sales by RHB Research, published on 23 October 2015

3) CapitaLand Mall Trust - New contributions from Bedok Mall from 4Q by CIMB Research, published on 22 October 2015

4) CapitaLand Mall Trust - 3Q results in line, positive consumer spending signs by Deutsche Bank Markets Research, published on 22 October 2015

5) CapitaLand Mall Trust - Hold: Results in line with expectations by HSBC Global Research, published on 22 October 2015

6) CapitaLand Mall Trust - Tapering Reversions by Maybank Kim Eng Research, published on 22 October 2015

7) CapitaLand Mall Trust - Had a good run, downgrade to HOLD‏ by OCBC Investment Research, published on 22 October 2015

Source : Daiwa Capital Markets

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