CRCT downgraded to Sell by OCBC on ‘short-term pain’ from China mall buys

The CapitaMall Wangjing mall in Beijing, part of the CapitaLand Retail China Trust portfolio. Credit: CapitaLand Retail China TrustThe CapitaMall Wangjing mall in Beijing, part of the CapitaLand Retail China Trust portfolio. Credit: CapitaLand Retail China Trust

OCBC downgraded CapitaLand Retail China Trust (CRCT) to Sell from Hold, saying the trust’s planned acquisition of three malls in China offered “long-term gain, but short-term pain.”

CRCT said Tuesday it agreed to acquire three China malls from CapitaLand for 2.86 billion yuan, or around S$589.2 million. The three malls are CapitaMall Xuefu and CapitaMall Aidemengdun in Harbin and CapitaMall Yuhuating in Changsha, and all have occupancy of 99 percent, “well above the market average,” the trust said in a filing to SGX.

OCBC called the deal a “strategic move,” but still had reservations.

“We believe the transaction will strengthen CRCT’s portfolio by expanding its geographical reach to two more provincial capital cities, improving tenant diversification and increasing its portfolio size which can in turn lower financing costs,” OCBC said in a note Tuesday. “The financing plan, however, remains a concern in the short term.”

CRCT plans to finance the deal with a combination of equity and debt, but the details haven’t been announced yet.

OCBC said that to keep its gearing level at a maximum of 40 percent, it would effectively have S$52.7 million of debt headroom, with the remainder of the purchase consideration likely to be funded via a rights issue, rather than a placement.

That could lead to a distribution per unit (DPU) dilution of 8 percent to 12 percent, based on 2018 results, OCBC said.

“We believe that it will be difficult for the transaction to be ‘DPU accretive’ unless CRCT’s consensus dividend yield compresses significantly on the back of further unit price rally,” the note said. “The transaction may, however, be ‘DPU yield accretive’ against the theoretical ex-rights price (TERP) in the event of a rights issue.”

OCBC cut its fair value to S$1.35 from S$1.50 on expectation of the potential equity fundraising.

CRCT’s units ended Wednesday down 2.61 percent at S$1.49.

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