DPU is down, retail sentiment is down. Why is CapitaLand Mall Trust still a buy?

SINGAPORE (Jan 24): By many accounts, CapitaLand Mall Trust is beginning to buckle at the seams amid the sluggish retail environment characterised by slow tenant sales and low shopper traffic.

Group revenue in 4QFY2016 had fallen 4.6% to S$169.3 million (RM529 million) owing to the redevelopment of Funan DigitaLife Mall and the divestment of Rivervale Mall. 4Q’s distribution per unit was stable at 2.88 Singapore cents, but fell 1.1% to 11.13 Singapore cents for the full year.

And yet, the counter remains a “buy” for both DBS Group Research and OCBC Investment Research.

OCBC’s analysts Andy Wong and Eli Lee pointed out that the REIT had bucked the overall retail trend, and recorded higher shopper traffic of 2.3% and higher tenant sales psf of 0.9%. Occupancy had also remained stable at 98.5%, though rental reversions increased just 1% for the full year.

DBS’s analysts Derek Tan and Mervin Song have also forecast a minimal growth in DPU for the next two years, due to the lack of yield accretive acquisitions.

However, Tan and Song are still positive on the REIT’s decision to redevelop Funan and its potential 2% boost to CMT’s net asset value. They also added that although Funan’s redevelopment cost of S$560 million to be fully funded through debt, it is still below the REIT’s available debt headroom of S$800 million and the REIT’s gearing would still be at a healthy 38%.

Even OCBC’s Wong and Lee believe CMT remains a “quality stock”, and expects the management to proactively manage their lease expiries, tenant mix and operational efficiencies to mitigate the downtrend on rent reversions.

To that end, DBS and OCBC have a target price of S$2.17 and S$2.20 respectively.

Shares in CMT are trading 1.5 Singapore cents lower at S$1.945 on Tuesday. — theedgemarkets.com.sg