Even with a proposed merger on the horizon, CapitaLand Mall Trust remains a top pick, says Daiwa Capital Markets analyst David Lum. The merger could be distribution per unit (DPU) neutral over FY2021-2022 before reaching positive DPU accretion of 1%-2% from FY2023, he adds in a September 11 note. 

Lum is maintaining his “buy” call on the trust, with an unchanged target price of $2.65.

CapitaLand Mall Trust (CMT) and sister REIT CapitaLand Commercial Trust (CCT) are proposing a merger through a scheme of arrangement, in which unitholders of both REITs will be voting for on September 29 to form CapitaLand Integrated Commercial Trust (CICT). If approved by unitholders, the merger would turn CICT into the largest pure-play retail REIT on the SGX.

See: EGMs ahead for two transformational transactions

“CMT will no longer be a pure Singapore-retail recovery play following the merger. Nonetheless, we believe the merger would still be worthwhile for unitholders although it might not be evident based on short-term DPU accretion,” writes Lum.

Lum now sees CMT’s major attraction as the long-term redevelopment and value-creation potential of the CICT portfolio, by far the largest in Singapore with nine assets each worth more than $1 billion and eight assets worth between $500 million to $1 billion. “We believe the only way for CICT to enjoy industry-low cost of capital is to achieve sustainable industry-leading DPU growth, and the only way to achieve it, in our opinion, is through opportunistic and well-executed development and redevelopment activity.”

“We see the short-term uncertainty over CICT’s ability to execute its strategy as a major investment opportunity as CMT units are now trading near cyclical-low valuations and offer exceptional value,” notes Lum.

Other analysts are in favour of the merger, which is planned to be carried out through a trust scheme of arrangement. 

See also: Analysts in favour of CMT-CCT merger due to benefits of scale

UOB KayHian says CICT will become the largest REIT in Singapore and the second largest REIT in the Asia Pacific region.

Meanwhile, DBS Group Research says the proposed merger will drive improved diversification and scale, which have yet to be priced in. The brokerage notes that CMT is down about 20% since the start of the year.

If all approvals are obtained at the EGMs, CCT will have development headroom of around $5.8 billion. This would be more than sufficient for the re-development of Capital Tower into an integrated development, which would require perhaps between $1.5 billion and $2 billion.

Another asset that a potential CICT could re-develop is Plaza Singapura/The Atrium Orchard where the Orchard Road area is expected to be transformed into Singapore’s lifestyle destination with innovative and unique non-retail offerings. 

As at 1.20pm, units in CapitaLand Mall Trust are trading at 3 cents higher, or 1.52% up, at $2.00.