Broker's take: DBS Equity Research downgrades CRCT to 'hold'

DBS Equity Research in a report on Monday downgraded its rating on shares of CapitaRetail China Trust (CRCT) from "buy" to "hold", with a lowered target price of S$1.64.

This comes after CRCT posted a distribution per unit (DPU) of 2.48 Singapore cents for Q4 FY2014 and a FY2014 DPU of 9.82 Singapore cents, which were below the research house's and consensus estimates of 10.80 Singapore cents and 10.20 Singapore cents respectively for FY2014.

The underperformance, said analysts Mervin Song and Derek Tak, was due to weaker than expected contribution from the Grand Canyon mall, an unexpected Q4 FY2014 net profits interest loss of 3.7 million yuan (S$802,000) at the Minzhongleyuan (MZLY) mall, and a larger number of units on issue on greater dividend reinvestment plan take-up.

Both analysts noted that CRCT's Q4 FY2014 tenant sales were strong, up 21.3 per cent year-on-year, which assisted the trust in achieving a 20.6 per cent increase in rents over the quarter. Owing to growth in Chinese domestic consumption and CRCT's strong track record, the research house expects positive rental reversions to continue, albeit at a lower rate due to the higher base effect.

However, given weaker than expected performance, the need to reposition the Wuhu mall due to heightened competition, disruption to MZLY over the next two years and higher assumed units on issue, DBS Equity Research has cut its FY2015-2017 DPU by 5-10 per cent and lowered its discounted cash flow-based target price to S$1.64 from S$1.70.