Broker's take: DBS says suburban malls a 'safer bet' over Orchard Road malls

DBS Group Research on Monday called malls with suburban characteristics a "safer bet" when compared to tourist-focused Orchard Road malls - which will likely lag and not return to optimal capacity given the lack of tourists in the near term.

However, a surprise may come from more office workers returning to offices by end-2020, said DBS analyst Derek Tan in a research note.

The research team's top sector picks are still Frasers Centrepoint Trust (FCT), CapitaLand Mall Trust (CMT) and LendLease Global Commercial Reit.

DBS said the strong rebound in shopper traffic at malls have not been priced in. Its car park tracker and weekly site visits imply that malls are seeing steady foot traffic, while queues for restaurants have returned.

While traffic and sales reported by various Reits in 2020 "appear weak", DBS said it believes the "tide has turned".

"If our read-through of the ground is right, we see further compression in gap to Covid-19 traffic and sales figures come Q3 2020 with potential for upside," Mr Tan wrote.

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With borders yet to reopen, consumers may spend at local malls, catalysed by attractive marketing and discounts offered by retailers.

"The worst is over, but the recovery is just underway," Mr Tan said.

DBS noted that current valuations have overlooked the sector's upcoming "robust" growth in distribution per unit (DPU) as rentals and DPUs normalise. It is projecting a 19.7 per cent rise in DPU going into FY2021 and a forward sector yield of 6.7 per cent.

"The retail S-Reits trade at an attractive 0.84 times price-to-book ratio, beyond -2 standard deviation (SD) levels on a 10-year historical basis, and at a sharp discount to a mean of 1.04 times," Mr Tan wrote. "Book values have remained resilient, falling by about 1.5-3 per cent in H1 2020, which is better than expected, and further material weakness is unlikely given the low interest rates."

He added that investors may have sidelined growth momentum despite the strong support for the sector in the form of government grants and landlord waivers to assist retailers. Liquidity shield through income retention is also viewed by the research team as sufficient to see the Reits through the last lap of the Covid-19 crisis.

As for where the laggards are, Mr Tan noted that CMT, SPH Reit, Starhill Global Reit and Lendlease Global Commercial Reit are at attractive valuations, trading at between -1 SD and -2 SD level on a five-year historical basis.

He maintained "buy" on CMT with a raised target price of S$2.40 from S$2.15, given the potential boost to the Reit's central malls such as Raffles City and Bugis Junction as the office crowds return. CMT units were trading up 2.6 per cent or S$0.05 to S$1.95 as at 11.33am on Monday.

DBS has a "hold" call on SPH Reit with a S$1.26 target price. The counter was trading flat at S$1.09 as at 1.02pm.

It kept its "buy" call on LendLease Global Reit with a lowered target price of S$0.85 from S$0.94, noting that the Reit continued to bring a strong value proposition at its current 0.7 time price-to-book level while delivering another quarter of earnings outperformance. Units of Lendlease Global Reit rose 0.8 per cent or 0.5 Singapore cent to 64.5 cents as at 11.33am.

FCT was still a "buy", said DBS, as it upped the target price to S$2.95 from S$2.65 as "the end game is near". As at 11.33am, units of FCT were trading 0.8 per cent or S$0.02 higher at S$2.49.

Starhill Global Reit rose one Singapore cent or 2.3 per cent to trade at 44.5 cents as at 1.02pm.