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Brokers' take: OCBC, CGS-CIMB downgrade CapitaLand Mall Trust to 'hold'

BROKERS OCBC Investment Research and CGS-CIMB have downgraded their ratings on CapitaLand Mall Trust (CMT) to "hold" amid macroeconomic uncertainties, while DBS and PhillipCapital have maintained their "buy" and "neutral" calls on the counter respectively. 

OCBC's fair value estimate on CMT stands at S$2.10, and CGS-CIMB has reduced its target price from S$2.25 to S$2.21.

Meanwhile, DBS is more optimistic with a 12-month target price of S$2.30, whereas PhillipCapital has forecast a target price of S$2.05. 

As at 2.12pm on Monday, units of CMT were trading at S$2.19 per unit, up 1.39 per cent, or three Singapore cents. Some 10.6 million units exchanged hands. 

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Analysts from OCBC and CGS-CIMB both noted that the trust's second-quarter results were in line with expectations. Gross revenue rose 1.6 per cent to S$171.4 million, and net property income (NPI) rose 2.8 per cent to S$120.8 million. In addition, distribution per unit increased by 2.2 per cent to 2.81 Singapore cents from last year. 

Year-on-year, CMT's growth was driven by positive rental reversion of 0.8 per cent as well as lower expenses, and occupancy remained high at 98 per cent, CGS-CIMB analyst Lock Mun Yee noted. She added that plans to rejuvenate Westgate, asset enhancement initiative (AEI) works at Tampines mall, and the redevelopment of Funan Digital Mall should help to drive growth. 

That being said, CGS-CIMB has downgraded its valuation on the counter as it has increased its risk-free rate to be in line with the market rate. "The stock price has increased more than 5 per cent since mid-June. With less than a 10 per cent total return, we downgrade the stock from 'add' to 'hold'. Upside risks could come from better than-expected results from AEIs, while downside risks include a slower recovery in rental reversions," CGS-CIMB noted. 

Similarly, OCBC has retained its forecast, but lowered its terminal growth rate assumption to 1.5 per cent from 2 per cent previously in light of "ongoing macroeconomic uncertainties". 

Separately, DBS analysts Derek Tan, Carmen Tay and Mervin Song believe that CMT remains a "safe harbour for investors", supported by a yield of about 5.5 per cent. 

Said DBS: "While the street remains divided on the stock given the uncertainties over the impact of the surge in new retail supply over 2018-2019, we believe the new supply may not be as threatening to CMT. According to our analysis, only less than 50 per cent of the incoming new supply is relevant competition to CMT’s properties. With new malls seeing strong pre-commitments ahead of completion, we believe that risks to CMT’s earnings has also minimised."

Nonetheless, key risks to their view include more aggressive rate hikes than expected which may cause ripples in the market. 

According to PhillipCapital's analyst Dehong Tan, CMT's overall tenant sales, which was down 0.2 per cent year-on-year in the first half this year, are still slow to recover, dragged by slower food and beverage sales.

"Rental reversions have stabilised at 0.8 per cent for the first two quarters, but we opine tenant sales, which has been the crucial missing ingredient in the recovery so far, needs to catch up for more meaningful upsides in rental growth. We are of the view that retail remains the Reit (real estate investment trust) sub-sector most challenged by advancements in technology including the e-commerce threat."

Mr Tan, however, noted that catalysts for growth remain the upcoming completion of Funan in the second half of 2019 or earlier.