What to make of Capitaland Mall Trust Q3 2020 earnings (C38U)

After my previous analysis about Capitaland Mall Trust (C38U), a lot has changed and my perspective on investing has also changed. I have learnt a lot more and have more opinions to share. On 22 October, they released their Q3 2020 report. I will base my opinions off this report as well as a shopper in the West Region who frequents Lot One and Westgate.

Highlights from Q3 2020 Financial Results

Generally the third quarter of 2020 was seen as the ‘golden child’ for recovery in the US, however it applies pretty closely to Singapore as well. We have officially moved away from Circuit Breaker and transitioned from Phase 1, then Phase 2. Shopper traffic has recovered, so all should be good right?

Theoretically, it should sound all nice and rosy. However, reality is always more pessimistic. My take is that people still refrain from shopping and entertainment in malls. They have moved that “less essential” aspect to their friends’ homes. (S/O to the richer friends with bigger houses)

Fall in Gross Revenue and Net Property Income

Capitaland Mall Trust Q3 2020 Financial Performance
Capitaland Mall Trust Q3 2020 Financial Performance

Gross Revenue dropped by 25.3% YoY and Net Property Income fell 27.6% YoY. The management has given us reasons for that.

There has been rental waivers granted by the landlord to tenants. Although I favour this move because it helps businesses tide through these tough times, shopper traffic may never return to the pre-COVID period. At least until a vaccine is found, and that would take a long time. So, it is impossible for the landlord to consistently issue rental waivers, this might lead to higher turnover rates in the near future.

Moreover, operating expenses fell to a lesser extent to revenue. Although a worrying sign, I will continue to hold out my judgement until Q4 2020. I like this REIT and I want to see how they will manage this crisis. The merger also provides me with some optimism.

But rise in Distributable Income, why?

Capitaland Mall Trust Q3 2020 DPU
Capitaland Mall Trust Q3 2020 DPU

Distributable Income rose 1.2% YoY for dividend investors! Time to celebrate? Time to order fish for your next cai png?

Not so fast. The income was released from the taxable income withheld from 1H of 2020. This accounted for 78% of the retained distribution. This was enabled by MAS earlier this year to allow REITs to hold more cash to act as capital buffers. As REITs are required to release at least 90% of taxable income, the management made a wise, conservative choice to withhold a bulk of the income. However, as we begin to see the light at the end of the tunnel, the management is beginning to release the income to its investors. This is a positive sign for investors.

Still a respectable Gearing Ratio

Capitaland Mall Trust Q3 2020 Key Financial Indicators
Capitaland Mall Trust Q3 2020 Key Financial Indicators

Gearing ratio is a measure of financial leverage. If the gearing ratio is higher, this means that the firm’s operations are heavily funded by debt and not by equity capital. Despite MAS raising the Gearing Ratio limit from 45% to 50% earlier this year, Capitaland Mall Trust manages to maintain a respectable gearing ratio of 34.4%, which is a sign of good management.

Potentially undervalued?

Currently, it has a Net Asset Value (company’s total assets minus its total liabilities, i.e. net worth) of $1.97, after the distributable income. This stands above its current price of $1.88. If you believe in the recovery of mall traffic as well as the benefits of a merger, this might be a good time to snatch up the REIT.

Shopper traffic recover and personal take

Capitaland Mall Trust Q3 2020 Shopper Traffic
Capitaland Mall Trust Q3 2020 Shopper Traffic

The slides mentioned that shopper traffic recovered to 60% of that in January. Personally, I would agree. In Lot One, where the mall isn’t really that good, is still mainly dominated by grocery shoppers. 

However, during weekends, Westgate is jammed packed with people. The linkage with Jem and the Jurong East MRT provides such convenience for people passing through the Jurong Regional Hub.

Merger with CCT to form CICT on 3 Nov

I believe the merger will be beneficial. My stance from the previous article does not change.

The intangibles

The Capitastar platform might increase the stickiness of Capitaland Mall Trust. I have seen more and more aunties scramble to collect points for vouchers. However, I believe the convenience of the mall will still be the ultimate deciding factor.

A shoppertainment show was also held. Although intention is great, I don’t think it can compete with true e-commerce sellers in the long run. However, it is a good attempt at retaining presence in the retail world.

As a holder of this REIT, I would stay the course. Hold it through these tough times. I foresee great upside with this REIT in the long run. As Singapore’s economy recovers, nothing will beat the convenience of our malls and the shopping attitude of Singaporeans. The greatest competitor would be e-commerce. However, I believe that, no matter how you spin it, some things cannot beat a brick-and-mortar store.

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