CapitaLand Mall Trust’s Westgate buy is ‘sweet deal,’ DBS says, raising forecasts

CapitaLand Integrated Commercial Trust building in Singapore’s Bugis neighborhood.CapitaLand Integrated Commercial Trust building in Singapore’s Bugis neighborhood.

CapitaLand Mall Trust’s purchase of the remaining 70 percent of Westgate mall it didn’t already for S$805.5 million is a “sweet deal,” as the worst is over for the mall, DBS said in a note this week, adding it was raising its earnings estimates.

The trust said in late August that it would acquire the 70 percent stake from CapitaLand, in a deal which will give the trust complete ownership of the mall in Singapore’s Jurong Lake District.

“While net property income yield of 4.3 percent appears tight at first glance, we believe that it is reflective of current market transactions and
offers upside if strategies to increase rents and extract further synergies are executed successfully,” DBS said. “We believe the timing (just as rents are showing signs of bottoming) is right and price is fair.”

It added that after a “deep dive” on Westgate’s fundamentals, it expected the worst is over, with rents appearing to bottom out and offering upside from reversions.

To be sure, other analysts have viewed the transaction as on the pricey side, with Nomura saying the agreed valuation for Westgate was likely higher than expected.

Additionally, DBS said the “stars are aligned” for CMT’s units to re-rate.

“Expectations for CMT are low, as investors are barely anticipating any rental reversion growth, in our view,” it said. “The recent uptick in retail sales, if sustained, could mean that downside to rental reversions is likely to be minimal and may trigger a re-rating of its share price.”

It said that as the retail sector bottoms out, CMT could “shine” in 2019 as full contributions from Westgate and the return of Funan spur growth in DPU over multiple years.

Funan has been closed for redevelopment since the second half of 2016 and is set to return in the second half of 2019, it noted, adding that so far, it has a “respectable” commitment rate of 50 percent for the retail wing, with a target of 80 percent by the end of this year.

DBS forecast net property income growing at a 5.8 percent compound annual growth rate (CAGR) to S$566.4 million by fiscal 2020.

It raised its fiscal 2019-2020 NPI forecasts, translating to a 4-5 percent boost in DPU in 2019-20 to 11.7 Singapore cents and 12.1 Singapore cents respectively. It raised its target price to S$2.45 from S$2.30, keeping  a Buy call.

The unit ended Tuesday up 0.48 percent at S$2.10.


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