CapitaLand Integrated Commercial Trust - DBS Research 2022-08-12: The One & Only Mercatus

CapitaLand Integrated Commercial Trust - The One & Only Mercatus

  • The sale of Mercatus’ S$4.1bn suburban retail portfolio has created a buzz in the market especially when a rare portfolio of gems is up for sale. Given the significant operational scale and lack of availability of suburban assets for sale in Singapore, it has garnered strong interests from investors, especially retail landlords / operators.
  • According to media reports, CapitaLand Integrated Commercial Trust (CICT, SGX:C38U) has been named as one of the contenders for the portfolio, along with Link REIT and Frasers Centrepoint Limited.
  • We believe CapitaLand Integrated Commercial Trust is probably the strongest contender among the local retailers given its larger size post the CCT-CMT merger compared to its peers. Moreover, CapitaLand Integrated Commercial Trust being the largest retail landlord / operator in Singapore would be able to draw synergies and economies of scale when both portfolios are combined.

How does Mercatus’ portfolio augment CICT’s portfolio?

  • Building base in Singapore suburban retail mall, that has proven to be relatively more resilient. The Mercatus portfolio is an opportunity for CapitaLand Integrated Commercial Trust to further build its base in Singapore’s suburban retail malls. With the Mercatus portfolio, CapitaLand Integrated Commercial Trust’s suburban mall portfolio’s NPI contribution to its retail portfolio will increase to 57% from 50% and NPI contribution to the Group will increase to 36% from 30%.
  • CapitaLand Integrated Commercial Trust’s overall retail portfolio will increase to 62% vs 60% by NPI contribution and 48% from 41% by NLA.
  • While retail sector has been going through a structural change with the uprising of e-commerce, Singapore’s retail especially suburban retail malls have shown resilience during difficult times such as COVID-19 pandemic and periods of recession.
  • Given CapitaLand Integrated Commercial Trust’s dominance in Singapore’s retail sector, we believe it will be able to draw synergies and extract more economies of scale from the portfolio. In addition, we believe CapitaLand Integrated Commercial Trust will be able to reap further benefits through asset rejuvenation or tenant remixing given its extensive platform of new / existing retailers in Singapore.

Room to raise yields?

  • We estimate the portfolio average rent to be close to ~S$15psf per month (ranging between S$10psf per month and S$16psf per month), and we believe the yield has the potential to increase over time. The average rental in FY21 was ~4% lower than the rental achieved during the pre-COVID times of FY17-19A.

Does the financial metrics work for CICT to acquire?

  • With the CCT-CMT merger, CapitaLand Integrated Commercial Trust has the benefit of being the largest S-REIT by market cap which gives them more room to acquire large portfolio of assets when good opportunity arises such as this. Compared to its local peers, CapitaLand Integrated Commercial Trust is probably the only S-REIT that has the capacity to acquire on its own. However, given its high gearing at close to 41%, we are mindful that CapitaLand Integrated Commercial Trust might stretch its balance sheet.
  • Given that CapitaLand Integrated Commercial Trust has various funding options to potentially fund the acquisition of Mercatus’ portfolio if successful, we estimate a few scenarios taking various permutations into consideration with DPU accretion in mind.
    • In our view, we believe the preferred funding option for the acquisition is scenario which assumes that CapitaLand Integrated Commercial Trust teams up with capital partner(s) to acquire the portfolio and takes a 30% stake in the portfolio. This allows CapitaLand Integrated Commercial Trust to keep gearing at 41.6% vs 40.6% as at Jun22, a manageable level in a rising interest rate environment. In this scenario, DPU and NAV are marginally accretive. With a longer runway and opportunities to yield up the assets, we believe CapitaLand Integrated Commercial Trust will be able to reap more benefits in the longer-term.
    • In another scenario, we estimate a potential rights issue at 10% discount to current share price. While the deal will still be marginally accretive, we are concerned the huge offering at a discounted price may cause dilution and near-term overhang on the CapitaLand Integrated Commercial Trust's share price.

Prefers partnership with capital partner(s) to keep gearing risks manageable in a rising interest rate environment.

  • Who could be potential capital partner(s)?
    • The most likely capital partner would be its sponsor. The benefit of keeping the assets within the CapitaLand Group would give the Group easier access in managing and recalibrating the assets. In addition, CapitaLand Integrated Commercial Trust would have a pipeline to acquire on a piecemeal basis when capital markets are more conducive to raise funds.
    • An alternative capital partner could be NTUC Income retaining some interest on the assets in exchange for CapitaLand Integrated Commercial Trust shares. NTUC Income could remain as a passive capital partner while able to ride on the upside when these assets yield up to its full potential.

Maintain BUY recommendation on CICT with target price of S$2.70.

Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @

Rachel TAN DBS Group Research | Derek TAN DBS Research | 2022-08-12
SGX Stock Analyst Report BUY MAINTAIN BUY 2.700 SAME 2.700

Previous report by DBS Research:
2022-05-05 CapitaLand Integrated Commercial Trust - Pathway To A Breakthrough

Target prices by 4 other brokers at CapitaLand Integrated Commercial Trust Target Prices.
Listing of broker reports at CapitaLand Integrated Commercial Trust Analyst Report.

Relevant links:
CapitaLand Integrated Commercial Trust Share Price History,
CapitaLand Integrated Commercial Trust Announcements,
CapitaLand Integrated Commercial Trust Dividends & Corp Actions,
CapitaLand Integrated Commercial Trust News Articles


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