EUR 850.00 For Business Accounts Only

Morningstar | CMT’s 2Q18 Results in Line; Active Portfolio Management and Funan Underpin Medium-Term Growth. See Updated Analyst Note from 20 Jul 2018

CapitaLand Mall Trust’s, or CMT’s, second-quarter 2018 results were in line with expectations. Net property income increased by 2.8% year over year to SGD 120.7 million on the back of a 1.6% year-over-year increase on revenue to SGD 171.4 million. Distribution per unit increased by 2.2% year over year to SGD 0.0281 per unit. Average rental reversion was healthy for first-half 2018 at 0.8%, led by Plaza Singapura, Junction 8, Clarke Quay, and The Atrium @ Orchard, while negative rental reversions were seen in six malls, mainly from Westgate and Bedok Mall, partly due to a change in trade mix. The trust also benefited from lower energy cost, which is expected to have a positive impact on its earnings until the end of 2019. We have increased CMT’s fair value estimate to SGD 2.40 per unit from SGD 2.35 per unit, as we factor in the lower costs of goods sold and selling, general, and administrative expenses seen so far this year, and have updated our assumptions on its interest cost. Our narrow economic moat and stable moat trend ratings are unchanged. We think the units are undervalued at the current price, with future growth mainly driven by the redevelopment of Funan, which is due to be completed by the fourth quarter of 2019.

Operationally, in first-half 2018, shopper foot traffic declined by 2.4% year over year while tenant sales per square foot declined by 0.2% year over year. Occupancy rates declined slightly to 98% from 98.9% at the end of first-quarter 2018, mainly driven by a decline in occupancy rates in Clarke Quay and Westgate. The decline in occupancy rates at Clarke Quay was mainly due to the departure of a few tenants that took up around 5%-7% of the space, while the decline in occupancy rates at Westgate was mainly due to management’s continued efforts to change the trade mix and amalgamate spaces at Westgate. Management is in discussions with potential tenants to take up the vacant space at Clarke Quay, which it expects to finalize soon. As for Westgate, the trust is carrying out an asset-enhancement initiative, which includes adding enclosure to selected alfresco food and beverage tenants and improving accessibility into the mall. This should improve the shopping experience and shopper footfall to the mall. The capital expenditure for this asset-enhancement initiative is expected to be less than SGD 10 million.

We still expect medium-term growth of CMT to be supported by the redevelopment of Funan. In the long term, we expect CMT to continue generating 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 or ahead of retail trends to make sure that shoppers would constantly be engaged with the offerings at CMT’s portfolio of malls. CMT is also moving on the right track by focusing on future technology and incorporating online shopping via its collaboration with Lazada, an online shopping platform focusing in the Southeast Asian region, and technological advancement by launching StarPay, a digital payment system in its app, into its traditional brick-and-mortar shopping malls. The trust is also seeking acquisition opportunities, and the focus will most likely be on domestic shopping malls.