RHB’s analyst Vijay Natarajan says that CICT’s results were “in line”, and its portfolio metrics are expected to stay firm this year after a strong FY2023.
The trusts’ office and retail portfolios registered healthy rent reversions of about 9%, with a much stronger 4QFY2023, the analyst notes. Its office portfolio occupancy rose 0.3 percentage points (ppts) q-o-q to 96.7% but is expected to decline in 1QFY2024 with the exit of Commerzbank at Gallileo at end-January.
Meanwhile, WeWork, its second largest tenant (about 2.4% of total rent) has been prompt in rental payments and management currently sees no major concerns, he adds. As a result, rental reversions are expected to stay positive in mid-single digit in FY2024.
Natarajan says that key catalysts for the trust are the potential divestment of Singapore assets, which will strengthen the balance sheet and position for acquisition of higher-quality assets from sponsors.
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Three of CICT’s assets, Bukit Panjang Plaza, 21 Collyer Quay, and Citadines Raffles Place are on the market, and if divested, could generate significant proceeds of more than $1 billion, which the analyst says could be used to buy more stakes in CapitaSpring. CICT currently holds a 45% stake in the property.
The trusts’ gearing has edged lower to 39.9% (9MFY2023: 40.8%) on the back of valuation gains, with management noting about 37% as a comfortable level in the current market, says Natarajan.
CICT’s Gallileo asset is expected to undergo major upgradation, with an estimated capex of EUR175 million - EUR215 million ($188.39 million - $231.46 million) over a period of 18 months. It is currently in advanced discussions with a prospective anchor tenant for a longer lease-term, while asset enhancements are also planned for the IMM building in Singapore and 101 Miller Street in Sydney to strengthen its asset positioning, the analyst adds.
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Including interest cost assumptions, higher occupancy and downtime adjustments, Natarajan has adjusted his FY2024-FY2025 DPU estimates by 1%-2%, and has arrived at a target price of $2.20 at a 6% environmental, social and governance (ESG) premium.
Likewise, analyst Brandon Lee from Citi says that CICT’s higher debt expenses mitigated its organic improvements in 2HFY2023.
“2HFY2023 DPU rose 2% y-o-y (+3% h-o-h) to 5.45 cents, missing our/consensus’ projections, with higher rental and occupancy mitigated by higher debt expenses (+22/+9% y-o-y/h-o-h),” he says.
Lee also expects a healthy office rent reversion, but a slowing of retail tenant sales and shopper traffic in CICT’s properties.
His target price for CICT comes in at $2.20, based on an average dividend discount model (DDM) and realisable net asset value valuation (RNAV). Lee has made assumptions in his DDM, including a risk-free rate of 3.5%, overall cost equity of 8.6%, and terminal growth of 3.3%. For RNAV, he values CICT’s properties at a weighted average cap rate of 4.3%.
“Key downside risks to our investment thesis on CICT are a sharp decline in economic activity that could result in reduced demand for retail and office space, which would affect occupancy and rental rates at CICT’s properties and thus its DPU and valuations; and a sharp rise in interest rates, which would raise the REIT’s cost of debt, lower its DPU, increase the cost of capital and lower our DDM valuation,” says Lee.
Upside risks include a faster-than-expected recovery in tenants’ sales/shopper traffic after re-opening; higher-than-expected retail rental rates following the asset enhancement initiatives, which would drive up DPU and hence our fair value; higher-than-expected office rental rates shall the ongoing office downcycle ends earlier than our forecasted 2023 and a stronger-than-expected economic growth.
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If any of these risk factors has a greater downside impact than anticipated, the share price will likely have difficulty attaining our target price. Conversely, if the impact of any of these upside risks is greater than anticipated, the stock could exceed target price, says Lee.
Finally, DBS echoes all the above sentiments from Citi and RHB, with a target price of $2.30.
As at 1.16pm, units in CapitaLand Integrated Commercial Trust are trading 1 cent higher or 0.51% up at $1.99.
