Analysts from CGS-CIMB Research and DBS Group Research have kept their “buy” and “add” calls on CapitaLand Integrated Commercial Trust (CICT) C38U with target prices unchanged at $2.35 and down from $2.40 previously at $2.30, respectively.
Meanwhile, RHB Group Research’s Vijay Natarajan has stayed “neutral” on the REIT with an unchanged target price of $2.00.
In their report dated Aug 1, Lock Mun Yee and Natalie Ong of CGS-CIMB say that CICT’s recovery momentum continues, with its 1HFY2023 ended June 30 distribution per unit (DPU) of 5.3 cents in line with 48.9% of their full-year forecast.
During the half-year period, CICT reported y-o-y increments of 12.7% and 10.1% in revenue and net property income (NPI) to $774.8 million and $552.3 million, respectively.
The analysts note that the improvement was due to a full 6 months of contribution from CapitaSky, which was acquired in April 2022, and contribution from the REIT’s Australian acquisitions from June last year. The completion of asset enhancement initiatives (AEI) at Raffles City Singapore also provided a boost, although this was partly offset by higher utilities expenses.
Compared to revenue and NPI, DPU in 1HFY2023 rose a smaller 1.5% y-o-y to 5.3 cents, eroded by higher interest expenses.
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The REIT’s committed occupancy rose 0.5 percentage points q-o-q to 96.7%, with an uptick across all its properties, while aggregate leverage stood at 40.4% with an average cost of debt of 3.2% as at 1HFY2023.
In the first half of FY2023, CICT’s retail portfolio enjoyed positive rental reversion of 6.9% in 1HFY2023, with downtown malls also delivering a strong rental reversion rate of 7%. Retail tenant sales and shopper traffic rose 6% and 17.5% y-o-y in 1HFY2023 as downtown malls benefited from higher tourist arrivals and an increase in the returning office crowd.
The office segment also delivered strong occupancy during the period, recording a committed occupancy increase of 0.6 percentage points to 9.4% at end-1HFY2023, boosted mainly by higher take-up of new fitted-out suites at 66 Goulburn in Sydney, Australia. Office reversions also remained healthy at 9.6%, with 304,200 sq ft of space renewed in 2QFY2023.
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According to the CGS-CIMB analysts, CICT remains optimistic on its retail segment and anticipates retail rents and occupancy rates rising in 2H23F, driven by limited supply and more inbound tourists. In the office segment, potential utilities cost-savings and positive rental uplifts could defray some of the “income vacuum” that has been created, they add.
Lock and Ong have kept our FY2023 to FY2025 DPU unchanged and maintain their dividend discount model (DDM) based target price of $2.35 with CICT currently trading at around a 5.3% FY2023 dividend yield.
Rachel Tan and Derek Tan of DBS have, however, lowered their target price to $2.30 from $2.40 previously while maintaining their “buy” call. They have trimmed their FY2023 to FY2024 DPU estimates by 4% to 10% to factor in some vacancies due to AEI plans and higher interest costs in FY2024 should interest rates remain higher for longer.
The DBS analysts’ lower target price of $2.30 has a total upside of 13%, of which 5% is from the FY2024 dividend yield, 2.5% from terminal growth and 10.5% from a valuation re-rating as a proxy to Singapore’s more resilient and stable economy and being a leader in the S-REIT space.
Still, they believe CICT remains a “proxy” to the relatively stable Singapore economy in a “cloudy” global growth outlook with its portfolio comprising over 90% of the commercial properties in Singapore.
“Aside from its organic growth potential, CICT is one of the few S-REITs with an opportunity to acquire newly completed prime Singapore commercial assets, potentially from its sponsor’s pipeline,” say the analysts in noting the REIT’s inorganic opportunities.
Meanwhile, China tourists returning to Singapore could mean another boost to growth in the commercial REIT space, which could drive the company’s share price performance, they add.
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For RHB’s Natarajan, CICT’s operational metrics “slightly surprised” on the upside with healthy retail rent reversions and improvement in overseas assets. Moving into 2HFY2023, while operational cost pressures are expected to taper off, he notes that interest costs are expected to see a slight increase and points out that the REIT’s gearing of 40.4% is on the “high side”.
Natarajan expects utility costs in 2HFY2023 to come off by around 16%, resulting in slightly higher margins, but also sees this impact offset by average interest costs rising by 10 to 20 basis points (bps) during the period. He notes that 78% of CICT’s debt is currently fixed and every 100bps increase should result in around a3% DPU decline from its unhedged portion.
He is also cautious on the outlook of the REIT’s office segment. Although the ongoing AEIs at CQ@Clarke Quay are expected to be completed later this year and drive an increase to committed occupancy levels that currently stand at 85%, its Gallileo property in Frankfurt, Germany will undergo a major asset enhancement for 18 months from January 2024, with significant capex expected and no income contribution from the asset during this period.
“We believe there is a possibility of equity fund-raising in the near term, that could be coupled with a potential acquisition of balance interest in CapitaSpring from the sponsor,” he says. “Overall, we recommend buying on dips, with large divestments and a rate pause as key catalysts, and the onset of a recession as a key risk.”
As at 4.06pm, units in CICT were trading 2 cents of 0.99% down at $2.00.
