DBS Group Research analysts Geraldine Wong and Derek Tan are keeping “buy” on CapitaLand China Trust (CLCT) with a higher target price of $1.60 from $1.55 previously.
The REIT is now trading at -1 standard deviation (s.d.) price-to-book (P/B) levels given the recent market correction.
The analysts add that the REIT’s forward yields of 6.9% and 7.7% for the FY2021 and FY2022 respectively are “compelling”.
CLCT's yields are also one of the highest among the larger cap peers, they note.
As the Evergrande crisis shone the spotlight on China’s real estate sector, where the heavy use of leverage has been regarded as the norm for two years, the current flight to safety trend should benefit CLCT with its strong cashflows and balance sheets.
“We believe CLCT meets these criteria, supported by resilient cashflows from a diversified portfolio of retail and ‘new-economy assets’. Its financial metrics are strong with minimal debt renewals in the interim,” write Wong and Tan in an Oct 8 report.
“In fact, we see CLCT being able to tap on its debt capacity to pursue strategic acquisitions, if asset owners look to divest given the tight liquidity situation,” they add.
The report, which was written before CLCT’s foray into the Chinese logistics sector on Oct 12, highlighted that the REIT’s retail portfolio will see improvement from its Beijing mall’s performance in the 2HFY2021.
The REIT’s retail portfolio will also maintain the pace of portfolio rejuvenation, with a potential divestment of Qibao mall.
“Business parks will also add to stability and growth of the portfolio and contribute 19% to the net property income (NPI) on a stabilised basis next year,” note the analysts.
On the higher target price, Wong and Tan have rolled forward valuations into FY2022.
“Organic growth drivers remain intact with the full-year contribution from the business park (BP) portfolio a natural growth driver for FY2022 distributions per unit (DPUs),” they continue.
Finally, inorganic growth opportunities may fuel the acquisition of third-party assets as distressed Chinese developers seek to divest their properties to improve their cash position, say the analysts.
As at 12.08pm, units in CLCT are trading 3 cents lower or 2.4% down at $1.22, or an FY2021 P/NAV of 0.8 times.