SINGAPORE (Aug 8): Units in CapitaLand Retail China Trust (CRCT) have fallen 6% over the past two weeks. From a 52-week peak of $1.63 in late July, the counter shed 10 cents to close at $1.53 on Aug 7. And the downtrend does not seem to have finished running its course.

Units in CRCT dipped another 3% to $1.48 in early morning trading on Thursday, before recovering slightly to $1.50 as at 3pm.

But market watchers are far from worried.

In fact, KGI Securities analyst Geraldine Wong notes that CRCT’s 1H19 results had exceeded expectations, and recommends that investors “accumulate” on the dip.

The group on July 31 announced distribution per unit (DPU) of 2.54 cents for the 2Q19 ended June, down 3.8% from 2.64 cents a year ago. This brought DPU for 1H19 to 5.13 cents, 4.8% lower than a year ago.

However, the decline was mainly due to the absence of divestment gain arising from the sale of its stake in CapitaMall Anzhen in 2Q18. Excluding the capital distribution, 1H19 DPU would have been 2.0% higher y-o-y. Income available for distribution would have been 5.0% higher y-o-y at $50.2 million.

1H19 net property income rose 7.2% to $80.2 million, on the back of a 15.9% drop in total property operating expenses to $31.0 million.

The decline in expenses was led the absence of operating lease rental expenses as a result of the adoption of a new accounting standard, and lower other property operating expenses.

See: CRCT declares lower 2Q DPU of 2.54 cents on absence of one-off gain

“CRCT is poised to benefit from an enlarged market cap, and incremental rent contributing in the coming two years,” Wong says in an Aug 2 report.

“Moreover, local consumption remains strong in China, supported by raising disposable income and urbanisation across Tier 2 cities. Retail sales in cities that CRCT is present in grew an average of 8.2% y-o-y for the first half of 2019,” she adds.

The brokerage has a target price of $1.68 on CRCT.

The strong local consumption and retail sales figures will bode well for CRCT, which is close to completing its acquisition of three malls in China from its sponsor CapitaLand.

The group last week proposed an equity fund raising to raise gross proceeds of at least $273.4 million. The proceeds will be used to partly fund the $505.4 million acquisition of three malls – CapitaMall Xuefu and CapitaMall Aidemengdun in Harbin, Heilongjiang province, as well as CapitaMall Yuhuating in Changsha, Hunan province.

In this fund raising exercise, CRCT will put up some 105 million new units in a private placement at an issue price of between $1.428 and $1.469 to raise between $150.0 million and $154.3 million. It will also offer a pro rata and non-renounceable preferential offering of nearly 86.9 million new units – on the basis of 87 new units for every 1,000 existing units held as at 5pm on the books closure date of Aug 13 – at an issue price of between $1.420 and $1.440 each to raise between $123.4 million and $125.1 million.

See: CRCT in $279 mil private placement, preferential offering to help fund mall buys

Following this acquisition, CRCT’s portfolio will increase to 14 shopping malls. Its portfolio size will grow 18.6% to $3.8 billion, while NPI will enjoy an uplift of 22.8% to RMB959.3 million on a pro forma basis.

“We will grow [around] 20% with this deal size, and for the next cycle of acquisition, we would be looking at close to a further 20% growth, and we hope to achieve $5 billion in assets soon,” says Tan Tze Wooi, CEO of the manager. “This is so that we can compete better in cost of capital. We are always working hard to see how we can strengthen the REIT and rejuvenate the portfolio.”

DBS Group Research lead analyst Carmen Tay believes the time is ripe for CRCT to pursue acquisitions.

“With a visible pipeline from the sponsor, we believe that it is an opportune time for CRCT to look at acquisitions. Aided by an active asset reconstitution strategy, CRCT continues to realise value for investors and proceeds can be deployed to value-accretive deals, which we believe could lead to higher earnings momentum,” Tay says in an Aug 1 report. 

DBS also has a “buy” call on CRCT. Its target price of $1.80 is at the higher end of consensus estimates, as it believes that the new acquisitions have higher growth potential.

Units in CRCT are trading at 0.9 times FY19 book with a dividend yield of 6.6%, according to KGI’s estimates.