• 1Q18 NPI and DPU within our estimates.
• Higher occupancy and lower operating expenses supported 1.8% YoY increase in DPU.
• Overall tenant sales still sluggish, but with a few outperforming subsectors.
• Sale of Sembawang Shopping Centre (SSC) at 1.97x FY17 valuation a positive surprise.
• Maintain Neutral with higher TP of S$2.05 (from S$2.03) to account for divestment gains.

The Positives

+ Higher occupancy and lower operating expenses propped up DPU amidst still challenging operating environment in terms of tenant sales. These came against the backdrop of flat rental reversions and tenant sales YoY. We are heartened to see the moderation in negative rental reversion (-1.7%) from FY17. Nonetheless, we believe tenant sales need to catch for this trend to sustain, given the elevated occupancy cost of 18.7%.

+ Sale of SSC to Lian Beng at 1.97x FY17 valuation a positive surprise. This translates to an exit cap rate of c.2.6%. We think the willingness of the buyer to pay the huge premium boils down to the 999-year lease of SSC. Leases of the other malls in CMT’s portfolio range from 60-99 years.

+ No more debt expiries in FY18. Management refinanced S$605mn worth of loans and a 6-year MTN in 1Q18. These loans were due to expire in 2018. Refinancing were done at lower interest rates (albeit using loans with shorter tenures ranging from 1-4 years). There is no more debt expiring in 2018 and hence little refinancing risk this year. 

The Negatives

– Overall tenant sales still sluggish, down 0.2% YoY. This is comparable to the flat YoY change for FY17. The three biggest trade sectors by GRI (F&B, Fashion, Beauty and Health) continue to struggle to post meaningful YoY sales growth. These sectors contribute c.55% of FY17 GRI.

Outlook

Despite generally rising interest rates, financing costs for FY18 should remain stable with the re-financing of expiring loans with shorter tenure debt at lower interest costs. Divestment proceeds from SSC could also be used to further pare down debt and for Funan’s redevelopment capex. We have assumed a S$3mn/S$6mn cash top-up from divestment proceeds to DPU for loss in income from SSC in FY18e/FY19e. Our DPU forecasts remain unchanged. Tenant sales has not picked up enough for us to foresee a more meaningful uptick in rental reversions.

Maintain NEUTRAL with higher target price of S$2.05 (from $2.03).

We adjust our forecast to factor in the SSC divestment. Increase in target price is factoring in divestment gains of c.S$122mn and our assumption of cash top-ups to DPU from FY18-FY20 in the absence of SSC’s rental income.