March 14, 2019

CapitaLand Mall Trust’s share price has performed well YTD – up 6% (S-REITs/STI: +9/+4%), mainly on optimism over Funan Mall’s opening, and the bottoming of retail rental rates. We believe positives are fully priced in and valuations are fair – it is trading at 1.2x P/BV. While retail rental seems to stabilising, we do not expect any strong growth in rates in the near term.

Tampines Mall could face some rental pressure from Jewel opening. About 1.1m sqf of new retail space is expected to come on-stream this year, with Jewel Changi Airport (Jewel, NLA: 0.6m sqf) being the largest mall. While space at Jewel is nearly fully pre-committed, we expect its opening to result in shopper traffic being diverted from other malls in the eastern region. With CMT’s key asset Tampines mall (12% of FY18 NPI) being among the bigger ones nearby, we expect it to see some pressure in rental reversions ahead. On retail demand, while the retail sales index rose 7.6% YoY in January, we believe this was mainly on one-off factors like pre-Lunar New Year shopping – do not expect growth to be sustained for the rest of the year.

Funan Mall’s committed occupancy rate at 80%. The revamped Funan Mall and office complex is expected to be open by end-2Q19 (June) with committed occupancy rates for both at c.80%, exceeding our 70% estimate. We expect average retail rental rates for the mall to be around SGD12-14psf, while the office rates could be c.SGD 8-10psf. Note that CMT already divested its serviced residences, at a gain of SGD20.6m in 2017. Management guided that it is still on track to achieve its yield-on-cost of 6.5% for the asset.

Westgate ramping up nicely post asset enhancement. After acquiring the remaining 70% stake in Nov 2018 CMT now owns 100% of Westgate. Management noted that the asset has been performing well after its asset enhancement, and sees room for more upside from the mall. Other than this, CMT also plans to reposition J-Cube and Lot One shopping malls, which have been recording a slightly weaker performance.

Gearing is comfortable at 34.2%, giving the REIT an ample debt headroom of SGD1bn for acquisitions (40% being a comfortable level). In recent briefings, management reiterated its preference for Singapore malls, but may selectively look at overseas assets, since options at home are limited. We lift FY19-21F DPU by 1-3%, to reflect the higher occupancy and rental rates for Funan Mall and Westgate. Remain NEUTRAL, TP rises by 3% to SGD2.20 – RHB

CapitaLand Mall Trust closed at: S$2.37