EUR 850.00 For Business Accounts Only

Morningstar | CMT's 2018 Results in Line; DPU Continues to Grow; Westgate and Funan Underpin Near-Term Growth

CapitaLand Mall Trust’s full-year results were in line with expectations. Net property income increased 3.2% year over year to SGD 493.5 million on the back of a 2.2% year-over-year increase in revenue to SGD 697.5 million. Distribution per unit increased 3% year over year to SGD 0.115. Average rental reversion was stable for 2018 at 0.7%, led by Atrium@Orchard, Clarke Quay, and Plaza Singapura, while negative rental reversions were seen in five malls, mainly from Raffles City, JCube, and Bukit Panjang Plaza. We raised our fair value estimate to SGD 2.42 per unit from SGD 2.40 after rolling forward our earnings model. We keep our narrow economic moat and stable moat trend ratings unchanged. We think the units are slightly undervalued at the current price, with future growth mainly driven by the acquisition of the remaining 70% stake in Westgate, which was completed Nov. 1, 2018, and the redevelopment of Funan which is expected to open in the second quarter of 2019.

Operationally, for the full year, shopper foot traffic declined 0.9% year over year while tenant sales per square foot increased 0.5% year over year. The average occupancy rate increased to 99.2% from 98.5% at the end of third quarter, mainly driven by higher occupancy rates in IMM Building, Clarke Quay, and Westgate. As flagged by management previously, the trust was in discussions with potential tenants to take up the vacant space at Clarke Quay, and this seems to have resulted in new tenancies in the fourth quarter. As for Westgate, the trust has been actively changing the tenant and trade mix by bringing in new tenants and experience to its shoppers. The trust also completed the asset-enhancement initiatives, which included adding enclosure to selected alfresco food and beverage tenants as well as improving accessibility into the mall, in December 2018. This should improve the shopping experience and shopper footfall to the mall. The trust also completed an asset-enhancement initiative at Tampines Mall and refurbishment work at Swissotel at Raffles City in 2018. In 2019, the trust will be undergoing refurbishment works at Fairmont at Raffles City, which is expected to be completed within this year. The trust is now evaluating the potential for asset-enhancement initiatives on JCube and Lot One.

We continue to expect near-term growth of CMT to be supported by the acquisition of the remainder 70% stake in Westgate and the redevelopment of Funan. Funan is expected to open in the second quarter of 2019. More than 80% of the leases for its retail and office space have been either signed or are in advanced negotiations. In the long term, we expect CMT to continue to generate value for investors from asset-enhancement initiatives, actively managing tenant and trade mix, and redevelopment of its properties. Through asset-enhancement initiatives, CMT is able to achieve better utilization of floor space and increase net leasable area by expanding existing properties. By actively managing tenant and trade mix, the trust could constantly bring in new tenants that are in line with or ahead of retail trends to make sure that shoppers are constantly engaged with the offerings at CMT’s portfolio of malls.

CMT is also on the right track by focusing on the future technology by incorporating online shopping via its collaboration with Lazada, an online shopping platform focusing on Southeast Asia, and technological advancement by launching StarPay, a digital payment system in its traditional brick-and-mortar shopping malls. In its latest initiative, it leased out 11,000 square feet of space at Plaza Singapura to NomadX, which showcases products from Alibaba’s Taobao and other online businesses such as Digital Fashion Week, evenodd, Revolte, and Style Theory to create a “phygital” (physical plus digital) retail experience. The trust is also looking for acquisition opportunities, with the focus most likely to be on domestic shopping malls.