SINGAPORE (Apr 30): Phillip Securities is upgrading CapitaLand Retail China Trust (CRCT) to “accumulate” with an unchanged target of $1.66 given stable DPU outlook, positive rental reversions from the Wangjing and Rock Square malls and with zero debt expiring this year.
CRCT’s management has demonstrated proactive mall management with the Wangjing AEI and the successful lifting of Xinnan’s yield on cost from 5.4% at acquisition to current 6.3% as targeted.
“We expect CapitaMall Wangjing’s successful AEI where more than 20 lifestyle retail and gourmet stores to open from 2Q18 and Rock Square’s fine-tuned tenant mix post-acquisition to sustain tenant sales,” says analyst Tan Dehong in a Monday report.
See: CapitaLand Retail China Trust's FY17 DPU comes in 0.5% higher at 10.1 cents
CRCT malls reported an improvement in retail sales, up 2.1% y-o-y versus 0.8% in FY17. This is driven by a 7.7% y-o-y improvement in total shopper traffic. Its biggest malls in Beijing are also seeing stable tenant sales growth of close to mid single-digit on average.
Then there is the $3 million capital distribution from CapitaMall Anzhen’s divestment gains to top up distributable income. Tan says this is within his expectation for management to make up for the loss of income from the divestment.
“Total net gain from the Anzhen divestment last July was $32 million. We estimate loss of NPI from Anzhen to be around $3.4 million a quarter and expect management to continue utilising divestment gains to top up loss of income,” says Tan.
In addition, CRCT has no refinancing needs this year even with early refinancing of $400 million loans due 2019 is underway. And as 80% of total debt hedged on fixed rates, this will mitigate impact from interest rate volatility over the next two years, says the analyst.
One of CRCT’s biggest downside is struggling malls still showing no signs of improvement. Overall portfolio occupancy dropped slightly to 94.9%. However, these malls take up only 5% of portfolio mall valuation.
“Our forecasts and target price remains unchanged. Upgrade comes after recent price weakness on interest rate worries. Our forecast assumes a flat y-o-y SGD/RMB exchange rate,” says Tan.
As at 2.58pm, units in CRCT are up 2 cents at $1.57 giving it an FY18 forecast yield of 6.4%.
