Analysts from DBS Group Research, Maybank Securities, OCBC Investment Research, RHB Group Research and UOB Kay Hian are positive on CapitaLand Integrated Commercial Trust (CICT) after the REIT’s distribution per unit (DPU) for the FY2021 of 10.40 cents stood largely in line with their expectations.
RHB analyst Vijay Natarajan has upgraded CICT to “buy” from “neutral” as he now sees the REIT’s outlook “brightening” from the easing of restrictions after “two tough years”.
The REIT’s contributions kicking in from its developments and the completion of its asset enhancement initiatives (AEIs) has also led Natarajan to see value emerging for CICT.
While Natarajan has kept CICT’s target price unchanged at $2.20, he estimates the REIT’s DPU for the FY2022 to rebound by 5% on the back of organic income growth, acquisition contributions, and lower rebates.
“CICT granted $8.4 million (1.3% of revenue) in rental waivers in 2HFY2021, less than half of the $18.9 million given in 1HFY2021. We expect waivers to further taper off to less than $5 million in FY2022,” writes Natarajan in his report on Jan 31.
“[CICT’s] portfolio valuation rose by 3.5% y-o-y, driven largely by cap rate compression in the office (5-20 basis points) and integrated assets, as well as the completion of CapitaSpring,” he adds.
CICT’s portfolio metrics are also expected to improve, as its office occupancy rate look set to grow from the advanced leasing discussions for Capital Tower and Six Battery Road.
“Rental reversion (FY2022) is expected to be in the positive low single digits, mainly aided by positive reversions at Capital Tower,” notes Natarajan. “With the further easing of restrictions anticipated by 2Q22, the occupancy rate is expected to stabilise at current levels with flattish to slightly negative rental reversions.”
CICT is also a pioneer on the environmental, social and governance (ESG) front, something which Natarajan is positive on. With its well-defined interim sustainability targets, the analyst has given CICT an ESG score of 3.3 out of 4.0 based on RHB’s proprietary in-house method.
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“As the score is three notches above the country median, we apply a 6% premium to its intrinsic value,” he writes.
To this end, Natarajan sees CICT’s current share price weakness at 0.9 times price-to-book (P/BV) as a “good entry point” for long-term investors even though it is likely to experience continued share price volatility in the near-term from rate hike concerns.
DBS analysts Rachel Tan and Derek Tan have kept “buy” on CICT as they see the REIT being a key proxy and beneficiary of the re-opening play.
“We estimate CICT could deliver 12% of DPU growth in FY2022 and a 9% two-year compound annual growth rate (CAGR), one of the stronger growth rates among peers,” write the analysts in their Jan 31 report.
As the largest Singapore REIT (S-REIT), CICT will be “too big to ignore”.
“The company’s integrated commercial assets drive synergistic value and its size offers a bigger platform to grow with acquisitions of integrated development led by the rising global trend of live-work-play,” they add.
Furthermore, CICT is one of the few commercial S-REITs that has the opportunity to acquire two newly completed prime Singapore office assets from its sponsor, 79 Robinson and the remaining 50% stake in CapitaSpring, note the analysts.
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The REIT’s near-term overhang on its office vacancy will also be lifted in FY2022 with CapitaSpring and Asia Square Tower 2 having achieved almost full committed occupancy. The newly-completed and refurbished buildings will begin contributions during the period.
Despite the positive outlook, the analysts from DBS have lowered their target price on CICT to $2.45 from $2.50 after factoring in its recent acquisition and divestment.
The new target price implies a price-to-net asset value (P/NAV) of 1.2 times, below +1 standard deviation of its historical range.
The analysts have also identified an economic downturn, as well as a prolonged recovery and weak sentiment as key risks to their view. “Setbacks from new waves of the pandemic could [also] delay CICT’s recovery,” they say.
Maybank Securities analyst Chua Su Tye has kept “buy” on CICT with an unchanged target price of $2.55.
“Easing negative retail reversions, tailwinds from office sector recovery, and traction from improving NPI, suggest stronger fundamentals in FY2022,” says Chua in his Jan 30 report.
“Its balance sheet remains strong, and we see upside from acquisitions, as management escalates its capital recycling efforts, backed by its sponsor’s Singapore assets under management (AUM),” he adds.
To Chua, CICT’s valuations are “compelling” with FY2022’s dividend yield of 6% and 1.0 times P/B compared to its peers, as well as CICT’s previous record.
In addition, the analyst sees room for recovery for negative rental reversions with the further easing of capacities in FY2022.
In CICT’s office segment, Chua notes that the REIT’s average rents rose 2.6% q-o-q to $10.33 psf pm vs -1.8% q-o-q in the 3QFY2021, and “likely to improve in FY2022 against rising Grade A rents”.
“Income contribution from CapitaSpring, 21 Collyer Quay and 6 Battery Road (post-AEI), should underpin DPU recovery,” he adds.
Further to his report, Chua estimates CICT’s DPUs to improve by 12% y-o-y and 3% y-o-y in the FY2022 and FY2023 respectively, due to higher occupancies and rents in Singapore and asset contributions from Australia.
In their report dated Feb 3, the team at OCBC Investment Research have kept “buy” on CICT with a lower fair value estimate of $2.44 from $2.51 previously after trimming its DPU forecasts slightly.
The lower estimate also takes into account higher market volatility and CICT’s increased exposure to overseas markets.
Despite the lower estimate, the team says it continues to view CICT as a “good proxy to the reopening theme, notwithstanding uncertainties over the Omicron variant”.
CICT’s ESG rating was lowered by the ESG research team in March 2021, albeit it still being the highest amongst the bank’s S-REITs coverage due to its high proportion of green-certified buildings relative to its peers, and its health and safety programmes.
The REIT did not initiate any layoffs following the merger of the former CapitaLand Mall Trust (CMT) and CapitaLand Commercial Trust (CCT), which yet another plus.
That said, the team explains that the downgrade “was driven by corporate governance practices which are weaker than its global peers”.
“Although CICT has a majority independent board, there are two directors serving on multiple boards, which might affect his/her effectiveness in performing fiduciary duties,” writes the team.
“Furthermore, CICT’s disclosures on its executive pay structure lag its regional peers,” it adds.
Finally, UOB Kay Hian analyst Jonathan Koh has maintained “buy” on CICT with a higher target price of $2.45 from $2.39 previously.
He has also kept his FY2023 DPU forecast unchanged after factoring in the acquisitions of 66 Goulburn Street, 100 Arthur Street and 101-103 Miller Street & Greenwood Plaza in Sydney, Australia, the divestment of One George Street and JCube, as well as the private placement of 127.6 million new units at $1.96 apiece.
To Koh, CICT is a triple-play on Singapore’s reopening; around 50% of employees have been allowed back into the office, while the return of the office crowd will enhance shopper traffic and tenant sales at the REIT’s downtown malls and integrated developments.
In 2HFY2022, the analyst also expects CapitaSpring to contribute “more significantly”. The building received its temporary occupation permit (TOP) in November 2021 and has secured JPMorgan Chase and Sumitomo Mitsui Banking Corporation as anchor tenants.
“CapitaSpring has achieved committed occupancy of 91.5% and another 5% is under advanced negotiation. 10 tenants have commenced operations. Committed leases start contributing progressively from 1HFY2022 and more significantly from 2HFY2022,” says Koh.
Catalysts to CICT’s share price, in Koh’s opinion, include a steady recovery in shopper traffic and tenant sales with progressive easing of social distancing measures, as well as the REIT’s asset enhancement and redevelopment of its existing properties.
As at 10.16am, units in CICT are trading 2 cents higher or 1.03% up at $1.96, or an FY2022 P/B of 0.93 times and DPU yield of 5.7%, according to RHB’s estimates.
Photo: CICT
