SINGAPORE (July 23): OCBC Investment Research and CGS-CIMB Securities have downgraded their ratings on CapitaLand Mall Trust (CMT) to “hold” from “buy” and “add” previously after the trust’s 2Q18 results came in line with both research houses’ expectations.
While OCBC has revised its fair value estimate down to $2.10 from $2.26 after lowering its terminal growth rate assumption to 1.5% from 2% in light of ongoing macroeconomic uncertainties, CGS-CIMB’s lower target price of $2.21 compared to $2.25 previously comes on the back of a higher risk-free rate to align with that of the market’s.
In a Monday report, OCBC lead analyst Andy Wong says he believes CMT investors can consider locking in some profits at the REIT’s current price level, considering how its FY19F distribution yield of 5.3% is approximately 0.9 standard deviations below its five-year mean.
“Based on a closing price of S$2.16 on 20 Jul, CMT has delivered total returns of 4.2% YTD and 12.3% over a 12M horizon, outperforming the FTSE ST REIT Index’s -2.2% and 5.9% total returns, respectively,” he notes.
Going forward, Wong believes a remaining 70% stake in Westgate not owned by CMT could be a potential acquisition target in the near-term now that the property appears to be stabilising, and in view of how CMT’s manager is always looking for capital recycling opportunities to boost its ROE.
Similarly, CGS-CIMB analyst Lock Mun Yee’s downgrade comes as she notes how CMT’s unit price has increased more than 5% since mid-June, and now implies a less-than 10% total return although her FY18-20 DPU estimates remain intact.
Lock nonetheless remains positive on the trust’s outlook given its ongoing trends of positive rental reversion, high occupancy rates, strong balance sheet and the manager’s continuous efforts to increase yield.
DBS Group Research, however, is maintaining its “hold” call on CMT with a higher target price of $2.30 compared to $2.19 previously as it views the trust as a “safe harbor for investors”, supported by its resilient and attractive FY18F yield of about 5.5% with total potential returns in excess of 10%.
“With signs that the retail sector is bottoming out, we believe that investors’ concerns on the potential earnings downside risk will dissipate,” says DBS analyst Derek Tan in a Monday report.
Contrary to the street’s divided opinions on the REIT given uncertainties over an expected surge in new retail supply over 2018-2019, Tan believes this may not be as threatening to CMT given how only an estimated 50% of the new incoming new supply is relevant competition to CMT’s properties.
“With new malls seeing strong pre-commitments ahead of completion, we believe that risks to CMT’s earnings has also minimised,” says Tan.
“The recent uptick in retail sales, if sustained, could mean that downside to rental reversions is likely to be minimal and result in a share price re-rating,” he adds.
As at 10.28am, units in CMT are trading flat at $2.26 or 18.2 times FY18F earnings based on DBS’s estimates.
