We Will See Weaker Revenue Amid Refinancing Risks In Singapore

Key Takeaways

• Economic uncertainties and rising interest rates could hinder financial flexibility, squeeze net margins, and slow retail revenue growth.
  
• Ongoing asset enhancement initiatives may strain short-term earnings but promise potential long-term benefits if executed effectively.
  
• Improved debt management and robust rental reversions are enhancing financial stability and revenue growth, while asset improvements promise long-term performance benefits.

Catalysts

CapitaLand Integrated Commercial Trust (CICT) is the first and largest real estate investment trust (REIT) listed on Singapore Exchange Securities Trading Limited (SGX-ST) with a market capitalisation of S$14.1 billion as at 31 December 2024.

• The softness in tenant sales and the potential for a recession in Singapore might signal weaker retail revenue growth for CICT, as consumers and businesses could downsize, impacting rent reversions and overall revenue growth.
  
• The marginal drop in occupancy rates, particularly due to lease expiries, could affect revenue and net property income if not resolved through timely lease renewals and new tenant acquisitions.
  
• Rising interest rates and economic challenges may lead to higher refinancing costs and impact financial flexibility, potentially squeezing net margins despite recent refinancing efforts to reduce the average cost of debt.
  
• The ongoing asset enhancement initiatives (AEIs), such as those at Tampines Mall, while potentially beneficial in the long term, require significant capital investment and might not yield immediate returns, affecting short-term earnings.
  
• Delays or challenges in tenant renewals, especially within the office segment, amidst the unpredictable macroeconomic environment, may result in stagnant or reduced rental income, impacting overall earnings projections.

CapitaLand Integrated Commercial Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CapitaLand Integrated Commercial Trust's revenue will grow by 1.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 58.9% today to 55.4% in 3 years time.
• Analysts expect earnings to reach SGD 931.7 million (and earnings per share of SGD 0.12) by about May 2028, down from SGD 933.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SGD1.2 billion in earnings, and the most bearish expecting SGD824.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.0x on those 2028 earnings, up from 16.8x today. This future PE is greater than the current PE for the SG Retail REITs industry at 16.9x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.99%, as per the Simply Wall St company report.

CapitaLand Integrated Commercial Trust Future Earnings Per Share Growth

Risks

• The reduction in the average cost of debt from 3.6% to 3.4% this quarter, aided by refinancing efforts and issuance of a $150 million seven-year fixed-rate note at 3.00%, is likely to positively impact net margins and reduce financial expenditure.
  
• Strong rental reversions across both the retail (10.4%) and office portfolios (5.4%) indicate robust demand, which can lead to increased revenue growth over the period, positively impacting earnings.
  
• Healthy financial metrics, including a stable portfolio net property income (NPI) margin of 74% and improved interest coverage ratio (ICR) from 3.1x to 3.2x, suggest that the company is maintaining financial stability, supporting net margins.
  
• The company reported a high level of lease renewals, with 75% to 80% retention rates, and active lease negotiations, which contribute to continuing revenue streams and stable occupancy rates, benefiting future earnings.
  
• Ongoing asset enhancement initiatives, such as the notable plan for Tampines Mall due to road transformations, hold the potential for significant operational and financial performance improvements, sustaining or increasing revenue streams.

Valuation

• The analysts have a consensus price target of SGD2.29 for CapitaLand Integrated Commercial Trust based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SGD2.45, and the most bearish reporting a price target of just SGD2.05.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SGD1.7 billion, earnings will come to SGD931.7 million, and it would be trading on a PE ratio of 27.0x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of SGD2.15, the analyst price target of SGD2.29 is 6.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.