Recovering NPI, BUY
Revenue/NPI rose 1.5% YoY/0.5% YoY in 1Q22 with higher contribution from
its retail, office and integrated development assets. Easing negative retail
reversions, together with tailwinds from office sector recovery, and then
traction from improving NPI, suggest stronger fundamentals in FY22E. Its
balance sheet remains strong, and we see upside from acquisitions, as
management escalates its capital recycling efforts, backed by its sponsor’s
Singapore AUM. We raise our DPU by c.2% and DDM-based TP to SGD2.60
(COE: 5.9%, LTG: 1.5%) from SGD2.55 with its recent deals. Valuations are
compelling at 5.2% FY22E div. yield and 1.0x P/B vs history and peers. BUY.
Improving retail rental reversions
Retail occupancy was lower at 96.6% in 1Q22 (vs 96.8% in 4Q21 and 97.1%
in 1Q21), due we think to Clarke Quay and Raffles City, with the latter
undergoing AEI. Rental reversion improved to -1.3% (vs -3.2% for FY21) and
was better at its suburban malls at +1.0% (vs +0.2%), while its downtown
assets came in at -3.1% (vs -7.7%). Like peers, tenant sales was stronger
(at above pre-pandemic levels) and ahead of improvement in footfall. We
see room for rents to strengthen with further easing of capacities in FY22.
Tailwinds from office recovery, rents strengthening
Office occupancy was stable at 91.4% (vs 91.5% in 4Q21) and was higher in
Singapore (90.4% to 92.3%), which mitigated 75.5% occupancy for the new
Australian properties. In Singapore, occupancy rose at Asia Square Tower
2 (95.6% to 97.5%), 6 Battery Road (79.7% to 88.4%), CapitaSpring (91.5%
to 98.5%), and Raffles City (93.4% to 96.1%). This was driven by stronger
leasing activity, which jumped to c.805k sf (vs c.257k sf in 4Q21 and c.172k
sf in 3Q21). Average rents rose 1.5% QoQ to SGD10.49 psfpm (vs +2.6% QoQ
in 4Q21), and should improve with rising Grade A rents. Management sees
positive reversion for the portfolio in FY22, with higher contribution from
CapitaSpring, 21 Collyer Quay and 6 Battery Road underpinning recovery.
Stepping up acquisitions in Singapore
Gearing increased to c.41%, pro-forma (from 37.2% at end-Dec 2021), as
three new Australian assets and 79 Robinson Road offset the divestment of
JCube. Its balance sheet remains strong, with an estimated SGD4.5b debt
headroom (at 50% limit), and fixed-debt ratio high at 85%. CICT estimates
a 1% rise in borrowing cost could lower DPU by 1.6%. We think management
is likely eyeing a larger Singapore acquisition from its sponsor, which could
be potentially timed with an EFR.