EUR 850.00 For Business Accounts Only

Morningstar | CMT’s 3Q18 Results In Line; Westgate and Funan Underpin Medium-Term Growth; FVE Remains at SGD 2.40

CapitaLand Mall Trust’s, or CMT’s, third-quarter 2018 results were in line with our expectations. Net property income increased by 1.1% year over year to SGD 122.7 million on the back of a 0.7% year-over-year increase in revenue to SGD 170.5 million. Distribution per unit increased by 5% year over year to SGD 0.0292 per unit. Average rental reversion was healthy for the first three quarters of 2018 at 0.6%, led by Clarke Quay, The Atrium @ Orchard, and Junction 8, while negative rental reversions were seen in five malls, mainly from Raffles City and Bedok Mall. The trust also benefited from lower energy costs, which are expected to have a positive impact on its earnings until year-end 2019. We retain our fair value estimate of SGD 2.40 per unit, along with our narrow economic moat and stable moat trend ratings. We think the units are undervalued at the current price, with future growth mainly driven by the acquisition of the remainder 70% stake in Westgate, which is expected to be completed on Nov. 1, 2018, and the redevelopment of Funan, which is expected to open ahead of schedule in second-quarter 2019 and start contributing to the trust from second-half 2019.

Operationally, in third-quarter 2018, shopper foot traffic declined by 1.8% year over year while tenant sales per square foot increased by 0.5% year over year. The average occupancy rate increased slightly to 98.5% from 98% at the end of second-quarter 2018, mainly driven by increased occupancy rates at Clarke Quay and Westgate. As previously flagged by management in the second-quarter results, the trust was in discussions with potential tenants to take up the vacant space at Clarke Quay following their departure, and this seems to have resulted in new tenancies. As for Westgate, the trust has been actively changing the tenant and trade mix by bringing in new tenants and new experiences for its shoppers, such as ABC Cooking Studio (a cooking class operator), soon-to-open Spotlight (a home accessory and furnishing store), and others. It is also undergoing an asset-enhancement initiative (expected to be completed in fourth-quarter 2018), which includes adding enclosures to selected alfresco food and beverage tenants, as well as improving accessibility into the mall. This should improve the shopping experience and shopper footfall to the mall. The trust is also undergoing an asset-enhancement initiative at Tampines Mall (expected to be completed in fourth-quarter 2018) and refurbishment works at Swissotel and Fairmont at Raffles City (expected to be completed in 2019).

We still expect medium-term growth for CMT to be supported by the acquisition of the remainder 70% stake in Westgate and the redevelopment of Funan. Funan is expected to open ahead of schedule in second-quarter 2019. For its retail and office space, 70% and 60% of leases, respectively, have been either signed or are in advanced negotiations. 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 can 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 ensure that shoppers are constantly engaged with the offerings at CMT’s portfolio of malls. CMT is also moving on the right track by focusing on future technology through incorporating online shopping via its collaboration with Lazada, an online shopping platform focusing on Southeast Asia, and technological advancements by launching StarPay, a digital payment system, in its traditional brick-and-mortar shopping malls. The trust is also partnering with WeChat Pay by rolling it out as an additional payment method in selected shops in Bugis Junction and Bugis+ to attract Chinese tourists. In addition, the trust is looking for acquisition opportunities, and the focus will most likely be on domestic shopping malls.