CapitaLand Retail China Trust raised to ‘buy’ by DBS on overdone fears

SINGAPORE (Jan 31): DBS Group Research has upgraded CapitaLand Retail China Trust (CRCT) to “buy” from “hold” with S$1.60 (RM5.00) as it believes the stock is oversold following the recent price correction.

“While CRCT will face headwinds in the form of a weaker average RMB exchange rate, impact from higher property taxes in Beijing and an increase in interest rates over the next few quarters, we believe these risks have largely been priced in,” says analyst Mervin Song in a recent report.

Song says the potential of CRCT’s malls has not been maximised as several properties are still ramping up or in a transition phase. These include Grand Canyon which is generating an annualised net property income (NPI) yield of about 5.3% versus target range of 7-8%; Minzhongleyuan and Wuhu which are incurring losses due to nearby road closures and repositioning works respectively, and the recently announced acquisition of Galleria mall whose margins are sub-optimal owing to previous management by third-party operators.

Then there is possible upside from acquisitions, adds Song. After the acquisition of Galleria mall, CRCT’s gearing is stabilised at around 37% but will still be below the 45% limit imposed by MAS. CRCT also has some debt headroom to leverage on increasing acquisition opportunities.

“Our understanding is that price expectations from potential sellers are now lower and some retail mall operators are looking to exit the sector given challengers in managing a retail asset,” says Song.

“We maintain our DCF-based TP of S$1.60. At current levels, CRCT offers 13% capital upside and an attractive 7.2% yield,” adds the analyst.

Units of CRCT are up 1 Singapore cent at S$1.42. — theedgemarkets.com.sg