Brokers' take: Citi sees CICT as next-best proxy to office upcycle after Keppel Reit

CITI Research has started a 90-day "positive catalyst watch" on CapitaLand Integrated Commercial Trust (CICT) C38U : C38U 0%in view of a distribution-in-specie (DIS) overhang removal, as well as potential operational improvement in Q4 FY2021 and distribution per unit (DPU) accretive acquisitions.

In a report issued last Friday, analyst Brandon Lee noted how CICT has underperformed Singapore real estate investment trusts (Reits) since CapitaLand first announced its restructuring in March this year.

"With pure office proxy Keppel Reit K71U : K71U 0%also in the midst of a DIS corporate action by its sponsor, we see CICT as the next-best proxy to the ongoing office upcycle," said Mr Lee, opining that the worst is over for the office sector given a lower pace of office rental decline in Q4 of 2020 versus the previous quarter.

The analyst is anticipating a brighter outlook for the sector in 2022 due to stronger economic normalisation and healthy supply.

In particular, he thinks CapitaLand's lower stake of 22.9 per cent in CICT post-DIS will "remove a major overhang" on the Reit's unit price, and partially increase its weightage in major indices given greater free-float market capitalisation.

While he acknowledges that the existing retail and office operational climate is "not ideal", at the unit price of S$2.00 he values CICT at 0.98 times price-to-book with a yield of 5.4 per cent and 6.1 per cent for FY2021 and FY2022, respectively.

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This is compared to the trust's mean of 1.09 times and respective yields of 5.4 per cent and 5.6 per cent for the estimated periods, as well as retail peers' 1.13 times mean and yields of 4.8 per cent and 5 per cent.

The analyst is also expecting CICT's Q4 FY2021 financials to mirror that of the previous year in terms of retail traffic and sales, in view of school vacations, the holiday season, and largely-closed international borders along with a rising vaccination rate.

"While Covid infections have been rising since the easing of measures in Aug 2021 and the next few weeks will be crucial, we think that a plateauing of cases and rise in vaccination may bring back confidence in shoppers and workers returning to malls and offices, respectively," he said.

Mr Lee also expects CICT to explore further acquisitions more actively going forward, given how its operations have stabilised and its sponsor aims to expand its funds under management.

The Reit's three-year assets under management (AUM) compound annual growth rate (CAGR) is estimated to come in at 2.1 per cent, with its last acquisition being in 3Q FY2019.

FY2020 DPU accretion has factored in three potential acquisitions at a 10 per cent valuation premium and 50-50 debt-to-equity funding within the sponsor's pipeline.

According to the analyst, a potential sale of non-core assets such as One George Street and JCube mall will improve the trust's gearing and net asset value.

"Medium-term growth engines could come from its sponsor's sizeable (property) pipeline of S$5 billion and redevelopment and aged assets, while we think CICT is likelier to explore minor asset enhancement initiatives in the short term in light of occupancy preservation," he added.

Units of CICT closed flat on Monday at S$2.