Analysts from CGS-CIMB Research, DBS Group Research, OCBC Investment Research (OIR) and RHB Group Research are mostly positive on CapitaLand Integrated Commercial Trust (CICT) after the REIT posted its FY2020 results on Jan 21.
See: CapitaLand Integrated Commercial Trust reports DPU of 8.69 cents for FY2020, 4Q20 distributable income up 26.8% y-o-y
CGS-CIMB analysts Lock Mun Yee and Eing Kar Mei have maintained “add” on CICT with a higher target price of $2.56 from $2.13 previously as they believe the REIT is “well-placed to benefit from a macro recovery” given its diversified and stable portfolio.
CICT’s distribution per unit (DPU) for the FY2020 ended December stood at 8.69 cents, going beyond Lock and Eing’s expectations at 107.2% of their FY2020 projections.
Based on the REIT’s portfolio occupancy of 96.4% in 4QFY2020 and 98% occupancy for its retail arm, as well as the -6.6% retail rental reversion reported, CICT’s management thinks that the retail sector may remain “under pressure” in the near term.
As the REIT as 16.3% of portfolio income derived from retail leases expiring in FY2021, the analysts estimate “low single-digit negative rental reversion to continue in FY2021”.
Following its merger, CICT has emerged as the largest integrated commercial REIT in Singapore with a $22.3 billion asset base.
“The expanded balance sheet capacity would enable the group to explore value creation strategies including asset enhancements, acquisitions and portfolio reconstitution while maintaining a stable portfolio performance,” note Lock and Eing.
Despite their “add” rating, the analysts have reduced their DPU estimates by 9.85% and 6.43% for FY2021 and FY2022 respectively due to merged entity’s enlarged unit base.
“Our current FY2020 – 2022 DPU compound annual growth rate (CAGR) of 12.7% has not factored in any visible longer term growth catalysts from potential asset enhancements and acquisitions,” they say.
DBS Group Research analysts Rachel Tan, Geraldine Wong and Derek Tan have also maintained their “buy” call on CICT with an unchanged target price of $2.50.
CICT’s FY2020 results were, according to the analysts, “in line” with expectations, with retained distributions fully paid out.
The way they see it, CICT is “en route to recovery”, even if it is a somewhat uneven process.
The analysts note that tenant sales and suburban malls in 4QFY2020 showed strong recovery. During the quarter, tenant sales came in at 94.5% compared to 4QFY2019, almost returning to pre-Covid-19 levels.
They also highlighted that trade categories such as home furnishing, jewellery and watches, books and stationery, as well as IT and telecommunications in 4Q2020 saw strong recovery in their numbers, while segments such as department store, leisure and entertainment remained “challenging”.
“Although the sales momentum started a little slow in the new year, management believes retail sales are en route to recovery though it may be uneven across trade categories until we return to full normalcy. We are comforted by this trend as it confirms our expectations that the retail subsector will lead the recovery back towards pre-Covid levels ahead of the rest,” they write.
Following the merger, CICT’s management has also guided it has plans to relook and recalibrate the enlarged portfolio to further drive growth with asset enhancement initiatives (AEI) as well as redevelopment opportunities and potential divestment of assets that have reached the optimal life cycle.
“In the midst of recalibrating the portfolio, management hopes to lower its gearing to below 40%. We believe there could be interests/value in the suburban malls for potential divestment,” add the analysts.
The research team at OCBC Investment Research (OIR) has similarly rated CICT at “buy” with a raised fair value estimate of $2.60 from $2.38.
This comes despite the REIT’s FY2020 DPU coming in below its expectations at 96.8% of its forecast.
The lower results were largely driven by the merger, which saw the consolidation of units in CapitaLand Commercial Trust (CCT) on Oct 21, 2020, as well as rental waivers.
On the REIT’s diverse portfolio that comprises retail and office properties, the team says it sees “green shoots” in retail, and “uncertainties” over the office segment.
Compared to CICT’s retail portfolio of 98% in committed occupancy, its office portfolio stood at 94.9%.
“Although rental reversions were positive in 2020, management alluded to the possibility of some negative rental reversions in 1HFY2021, but was hopeful of a recovery in 2HFY2021,” says the team.
“Leasing enquiries and demand have seen a pick-up at the start of the year, but we believe there are still uncertainties over the trend of telecommuting over the medium to longer term. CICT’s CapitaSpring has achieved its topping-out milestone, with current committed occupancy of 38% (as at Jan 19), and another 22% under advanced negotiation,” it adds.
In terms of financial position, CICT’s aggregate leverage increased from 34.4% as at Sept 30, 2020, to 40.6% as at Dec 31, 2020, due to additional debt taken for the merger.
“Management highlighted that this was still manageable, but acknowledged that it would prefer to bring its leverage ratio below 40%,” notes the team.
“Over the medium to longer term, CICT is open to exploring redevelopment opportunities within its portfolio, which could take place over a three- to five-year horizon,” it adds.
“We roll forward our valuations and also raise our terminal growth rate assumption by 25 basis points to 1.25% given more visible signs of a recovery in the global economy and retail sector.”
Contrary to the rest, RHB Group Research analyst Vijay Natarajan has maintained his “neutral” rating on CICT with the same target price of $2.10.
The way he sees it, CICT’s 4QFY2020 results highlight a challenging environment faced by retailers, with uneven recovery seen across various retail sub-sectors.
“With a sizeable asset base post-merger, CICT plans to reconstitute its portfolio (divestment), rejuvenate and redevelop some of its older assets over the next few years, which we see as positive moves. Valuations however are not compelling with the stock trading at a 15% premium to book value,” he says.
To this end, Natarajan has reduced his forecasts for 2021-2022 by 3% considering lower rental expectations.
“Our cost of equity (COE) assumptions are also lowered by 30 basis points taking into account a lower cost of capital for the merged entity,” he says.
However, he notes that CICT’s DPU is expected to rebound by 25% in FY2021 on the lack of rental rebates that were granted in FY2020, earnings accretion from the merger, as well as lower interest costs.
“Rental rebates ahead are likely to be more targeted in nature and we estimate it to amount to around $10 million for 2021, barring another lockdown. Portfolio value declined marginally by 0.4% from June 2020 to $22.3 billion mainly due to revaluation losses at its integrated developments (Raffles City mainly),” he says.
See also: CapitaLand Integrated Commercial Trust faces challenges as Raffles City valuations take a hit
On rent reversions, Natarajan expects rates to remain “flattish” for FY2021 after its office portfolio achieved positive rent reversion for FY2020 aided by lower rate of expiring rents.
Units in CICT closed 2 cents lower or 0.9% down at $2.28 on Jan 22.
