Better reversions seen for CMMT

CapitaLand Malaysia Mall Trust (April 25, RM1.13)

Maintain outperform with a target price (TP) of RM1.30: CapitaLand Malaysia Mall Trust’s (CMMT) first quarter of financial year 2018 (1QFY18) realised distributable income (RDI) of RM41.2 million came in within both our and consensus expectations at 25% each. There are no dividends, as expected.

Year-on-year (y-o-y), top line was down by 2.9% on lower rental rates from negative reversions at Sungei Wang Plaza (SWP) and The Mines (TM), and lower occupancy at Tropicana City Property (TCP) and SWP. All in, RDI declined by 2.6% on higher financing cost (+2%) from additional revolving credit facilities drawn down for capital expenditure works and increase in overnight policy rates (OPR), and offset by slightly lower expenditure (-1.7%) and interest income (-8.6%).

Quarter-on-quarter (q-o-q), top line was down by 2.5% due to lower rental at East Coast Mall (ECM), TM and TCP, likely due to ongoing refurbishments. However, operating cost declined by 5.1% to a more normalised level as 4Q saw higher service charge, property maintenance and marketing expenses, while financing cost inched lower marginally by 1%. As a result, RDI increased by 1.1%.

Reversions were finally positive at +2.2%, improving significantly from -12.4% in 1QFY17, and -1.3% in 4QFY17. Y-o-y improvements were mainly due to: i) TM: +0.1% (from -6.5% in 1QFY17); ii) SWP: -5.8% (from -38.8% in 1QFY17), and iii) Gurney Plaza (GP): +4.6% (from +1% in 1QFY17). Additionally, occupancy remains fairly stable at 93.7% versus 95% in 1QFY17. This was despite a slight decline in SWP’s occupancy to 80% (from 90% in 1QFY17), which we believe is due to movement of tenants in the light of refurbishments at the mall. We expected such fluctuations for the near term and thus have accounted for it, while we expect occupancy to pick up in coming quarters.

Maintain FY18 estimate (FY18E) and FY19E of RM164 million and RM165 million. We expect low single-digit to mildly negative reversions on leases expiring. Our FY18E and FY19E GDPU/NDPU of eight sen and 8.1 sen/7.2 sen and 7.3 sen suggest gross yields of 7%/7.1% (net yields of 6.3%/6.4%).

We reiterate our “outperform” call and TP based on FY18E GDPS/NDPS of eight sen/7.2 sen, on an unchanged +2.1 percentage points spread to the 10-year Malaysian Government Securities target of 4%. Our applied spread is +0.5SD above historical averages to encapsulate investors’ concerns of oversupply issues and OPR hikes, but we may look to remove this going forward once confidence returns to the sector. We are comfortable with our call and maintain CMMT as our top pick as we believe most downside risks have been priced into our earnings model and valuations, while there is recovery potential from better reversions going forward, especially post asset enhancement initiatives (AEIs). At current levels, valuations are attractive at 7%/6.3% (gross/net yields) versus its retail peers (of 6.1%/5.5% gross/net yields).

Risks to our call include bond yield expansions, lower-than-expected rental reversions, and lower-than-expected occupancy rates.

Management plans to spend around RM70 million and RM50 million on capital expenditure in FY18 and FY19 for refurbishment at SWP, TM, ECM and GP. FY18 will see 45% of net lettable area (NLA) expiring (8% from expiry of a mini anchor tenant) while we estimate around 30% of NLA expiring in FY19 as CMMT’s expiries are on a staggered basis of around 30% per annum. SWP may not see positive rental reversions in the near term of which we have already accounted for in our forecasts, but we expect it to continue recovering on improved mall accessibility now that the mass rapid transit Line 1 is operational, and post completion of the AEIs by the second half of FY19. — Kenanga Research, April 25

This article first appeared in The Edge Financial Daily, on April 26, 2018.

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