• NPI and DPU were within our expectations.
• Improvement in retail sales, up 2.1% YoY vs 0.8% in FY17.
• S$3mn capital distribution from CapitaMall Anzhen’s divestment gains to top up distributable income.
• No refinancing needs in 2018.
• Upgrade to Accumulate with unchanged DDM-derived target price of S$1.66.

The positives

+ Improvement in retail sales, up 2.1% YoY vs 0.8% in FY17. This is driven by a 7.7% YoY improvement in total shopper traffic. We expect CapitaMall Wangjing’s successful AEI where >20 lifestyle retail and gourmet stores will open from 2Q18 and Rock Square’s fine-tuned tenant mix post-acquisition to sustain tenant sales. CRCT’s biggest malls in Beijing are seeing stable tenant sales growth of close to mid-single digit on average. Above mentioned malls take up 71% of total portfolio mall valuation.

+ S$3mn capital distribution from CapitaMall Anzhen’s divestment gains to top up distributable income. This is within our expectation for management to make up for the loss of income from the divestment. Total net gain from the Anzhen divestment (July 2017) was c.S$32mn. We estimate loss of NPI from Anzhen to be around S$3.4mn a quarter and expect management to continue utilising divestment gains to top up loss of income.

+ No refinancing needs in 2018. Early refinancing of S$400mn (40% of total) loans due 2019 is underway. 80% of total debt hedged on fixed rates. This will mitigate impact from interest rate volatility over the next two years.

The negatives

– Struggling malls still showing no signs of improvement. Overall portfolio occupancy dropped slightly to 94.9%. While the bigger malls remain stable, malls under stabilisation continue to struggle. Nonetheless, these malls take up only 5% of portfolio mall valuation.

Outlook

DPU outlook is stable. Positive rental reversions from the Wangjing AEI and Rock Square will continue to support earnings. No debt expiring this year mitigates impact from interest rate volatility.

Upgrade to Accumulate with unchanged target price of S$1.66.

Our forecasts and target price remains unchanged. Upgrade comes after recent price weakness on interest rate worries. Our forecast assumes a flat YoY SGD/RMB exchange rate. Management has demonstrated proactive mall management with the Wangjing AEI (ROI>30%) and the successful lifting of Xinnan’s yield on cost from 5.4% at acquisition to current estimated 6.3%, as originally targeted.

Figure 1: CRCT portfolio statistics – Rental reversions and tenant sales picked up from 2017