• Stay BUY and TP of SGD2.30, 8% upside with c.5% FY24F yield. We are neutral on CapitaLand Integrated Commercial Trust’s proposal to acquire a 50% stake in the shopping mall ION Orchard and ION Orchard Link (both termed under “ION Orchard” in this report), as the pricing is slightly on the higher end. However, from a market timing perspective, the deal comes at an opportune time with rate cuts on the horizon – the REIT’s enhanced size, Singapore focus and improved liquidity post acquisition will help to propel its share price further.

• Acquiring 50% stake in ION Orchard for SGD1.85bn (SGD3.7bn on a 100% basis) from its sponsor, CapitaLand Investment (CLI SP, NR). The remaining 50% stake is held by the Hong Kong developer, Sun Hung Kai Properties. The acquisition price is in between the latest two independent valuations. But based on end-2023 financials, the asset was valued in CLI’s book at c.SGD3.4bn and will result in a c.SGD150m gain for its sponsor. Gross yield (1H) for the deal is ~7.1%, and we estimate NPI yield to be in the mid-4% range. The iconic high-end mall has a balance lease of 81 years and sits on top of the Orchard MRT station, and houses various top brands (Figure 3). The committed occupancy rate is at ~96%, while management guided for rent reversions to be in high single digits – similar to that of its other downtown Singapore malls. The acquisition will strengthen CICT’s Singapore focus, which investors are likely to view favourably. Downtown malls (by NLA) will account for 57% of its Singapore retail exposure, from 52%.

• To be funded by a majority of equity, with private placement proceeds of no less than SGD350m, at an issue price range of SGD2.038-2.091 (1-3.5% discount to adjusted VWAP) and preferential offering of SGD757m at SGD2.007 per unit (56 preferential units for every 1,000 existing units). The rest will be funded by debt, with CICT guiding for debt cost in the high 3%. Based on the above funding (and assuming the 70% entire management fee paid in units vs 50% currently) CICT expects pro forma DPU accretion at 1.2% (for FY23) and +0.9% (1H24). There is, however, potential upside of an extra 1% to DPU accretion, if CICT manages to get tax transparency status for income, subject to its JV partner’s agreement and government approvals.

• Gearing post acquisition should stay stable, at 39.9%. We also see room for more divestments in the near term from mature/non-core assets, eg Bukit Panjang Plaza, 21 Collyer Quay and Citadines Raffles Place – the proceeds of such may be channelled to acquisitions and asset enhancements.

• We maintain estimates pending EGM approval (November) for the deal, after which the acquisition is expected to be concluded by end-2024. CICT’s ESG score of 3.4 (out of 4.0) is three notches higher than country median, so we applied a 6% ESG premium to its intrinsic value derive our TP.

Source: RHB Research - 4 Sep 2024