Broker's take: CapitaLand Mall Trust poised to surprise on upside, says DBS

CAPITALAND Mall Trust's (CMT) improving portfolio metrics and merger benefits have not been priced in, thus the real estate investment trust (Reit) is poised to surprise on the upside, according to DBS Group Research.

In a report on Wednesday after market close, DBS reiterated its "buy" call and target price of S$2.40 on the counter.

Units of CMT fell S$0.01 or 0.5 per cent to trade at S$1.94 as at 10.03am on Thursday.

Analyst Derek Tan wrote that CMT's proposed merger with CapitaLand Commercial Trust (CCT) will drive improved diversification and scale - benefits which have yet to be priced in.

"CMT trades at attractive valuations of close to one-time P/NAV (price to net asset value) and an implied EV/GFA (enterprise value to gross floor area) of S$1,864, a good discount below recent transactions," he said on Wednesday.

With forward yields of more than 6 per cent, beyond one standard deviation of the Reit's mean, the risk-reward ratio is attractive, the analyst added.

Moreover, CMT's widening yield disparity with its retail peers is "too large to ignore", according to Mr Tan.

The counter was trading at a 120 basis point (bps) yield premium to retail peers, more than one standard deviation from an average 20 bps premium differential.

Its share price weakness in the year to date - lagging behind both the large cap Singapore-listed Reits (S-Reits) as well as pure-play suburban retail peers - is noteworthy and an opportunity for investors to accumulate, DBS said.

Since the start of this year, CMT units have lost about 20 per cent, while the top 10 S-Reits by market cap are now, on average, back to the prices at the beginning of 2020.

"We believe this underperformance is unwarranted given its diversified portfolio coupled with dominant properties in the office and retail sub-markets in Singapore," Mr Tan wrote.

Over time, DBS expects the CCT-CMT combined entity, CapitaLand Integrated Commercial Trust, to reclaim its premium over its peers as it restarts its growth engines after the pandemic to deliver higher distributions to unitholders.

While investors have generally focused on suburban malls being the ones to lead the retail sector's recovery, DBS believes that the next rerating catalyst will be the malls in the central business district.

These centrally located malls will see a rebound in operational metrics when office workers return, Mr Tan said.

CMT's portfolio metrics will likely maintain an upswing, with shopper traffic on an uptrend towards pre-Covid-19 levels, he added.