Daiwa: CMT’s Westgate deal expensive, but ‘could have been worse’

CapitaLand Mall Trust building in Singapore’s Bugis neighborhood.CapitaLand Mall Trust building in Singapore’s Bugis neighborhood.

CapitaLand Mall Trust’s deal to buy the 70 percent of Westgate mall it doesn’t already own doesn’t look attractive, Daiwa said in a note on Thursday.

“From CMT’s perspective, we are not thrilled with the acquisition as it was struck at an extremely tight entry net-property income (NPI) yield of 4.3 percent,” Daiwa said. “However, we believe that CMT could have done much worse, such as use the money to buy a mall overseas.”

On Monday, CapitaLand Mall Trust’s manager said it is set to acquire the 70 percent of Infinity Mall Trust it doesn’t already own for S$805.5 million from CapitaLand, including other costs, in a deal which will give the trust complete ownership of Westgate mall in the Jurong Lake District. CMT will fund the acquisition either through debt or a combination of debt and equity, with the transaction expected to be completed in the fourth quarter, the trust manager said in a filing to SGX.

“On most indicators, we believe CMT is overpaying slightly for Westgate as the lowest cap rate for any mall in CMT’s portfolio was 4.4 percent in its 30 June 2018 valuations,” Daiwa said.

It noted Westgate’s cap rate as of the end of June was at 4.6 percent, compared with 4.75 percent at the end of 2017.

“Unless one believes that cap rates are set for a further long-term secular decline, a 4.3 percent yield for Westgate looks on the expensive side to us,” Daiwa said.

But it noted that the deal “looks good” compared with CMT’s divestment of Sembawang Shopping Centre, completed in June, for S$248 million at what the investment bank estimated was a 2.6 percent exit cap rate.

Daiwa also said the deal wasn’t as bad as it could have been.

“Westgate is a well-located and strategic mall, and we are confident that CMT, through its sector-leading local core competence, can probably raise the NPI yield on investment to 5 percent in five years’ time or possibly even sooner, something it would not be able to
accomplish with an overseas acquisition, in our view,” Daiwa said.

Daiwa kept CMT at Outperform with an unchanged S$2.36 target price.

Units of CMT were unchanged at S$2.17 at 12:00 P.M. SGT.

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