SINGAPORE (June 12): OCBC Investment Research expects CapitaLand Retail China Trust’s (CRCT) acquisition of three malls from its sponsor will strengthen its portfolio.
This is by expanding its reach to two more provincial capital cities, improving tenant diversification and lower financing costs, says OCBC.
The financing plan, however, remains a concern in the short term, as this would likely involve equity fundraising.
To recap, CRCT has agreed to acquire 100% interests in three companies that hold three multi-tenanted malls in China – CapitaMall Xuefu and CapitaMall Aidemengdun in Harbin and CapitaMall Yuhuating in Changsha -- from sponsor CapitaLand.
See: CRCT to acquire three CapitaLand malls in China for $505 mil
CRCT intends to finance the acquisition with a combination of debt and equity and has stated that its objective is to achieve accretion. The financing plan details will be decided at a later date.
The transaction is conditional upon unitholders’ approval and is expected to be completed in 3Q19.
The malls will increase CRCT's portfolio GFA by 30.7% and currently enjoy an average occupancy of 99.0%.
As at 31 Mar 2019, CRCT’s gearing was 35.5%. Assuming CRCT geared up to 38.0%, this would translate into a debt headroom of $301 million.
In a Tuesday note, OCBC analyst Deborah Ong says CRCT has $217.2 million of debt headroom to a 38% gearing limit to use for the outlay, taking into account the debt held by the three holding companies that needs to be repaid by CRCT.
“To raise the remainder of $288.2 million needed for the transaction, a rights issue – as opposed to a private placement – may be required,” says Ong.
Assuming a 2.9% cost of debt and a 15% discount to share price of $1.56 on Monday for the rights issue price, this would translate to a FY18 DPU dilution of 7% -- based on 35% leakage to NPI.
“We believe that it will be difficult for the transaction to be “DPU accretive” unless CRCT’s consensus dividend yield compresses significantly on the back of further unit price rally,” says Ong.
The transaction may, however, be “DPU yield accretive” against the theoretical ex-rights price (TERP) in the event of a rights issue.
“An upside risk to our thesis is the divestment of one of CRCT’s assets to help fund this acquisition,” adds Ong.
In anticipation of a potential equity fundraising, OCBC’s fair value drops 8% from $1.50 to $1.38. The house is downgrading CRCT from “hold” to “sell”.
As at 9.54am, CRCT is down 2 cents at $1.51 implying a 6.9% FY20F DPU yield.
