CMMT to revamp its malls

CapitaLand Malaysia Mall Trust (Oct 21, RM1.56)

Maintain buy with an unchanged target price of RM1.70: We cut CapitaLand Malaysia Mall Trust’s (CMMT) financial year ending 2016 (FY16)/FY17/FY18 earnings by 9%/6%/6% as net profit interest (NPI) margins grew at a slower pace than anticipated, with third quarter FY16 (3QFY16) NPI standing at 65.7% versus our forecast of 70%. This is due to the negative reversions from Tropicana City Mall at 6.7% year-on-year (y-o-y).

The negative reversions were due to management’s efforts to realign the mall and include mini anchor tenants in the mix. Occupancy improved to 92.5% in 3Q16 (2Q16: 91.9%). Tropicana City Mall presents CMMT with a good growth avenue.

Excluding the newly acquired Tropicana City Property, CMMT’s portfolio shopper traffic improved by about 9.4% y-o-y in 3Q16, marking a turnaround in the visitor footfall downtrend in the previous year. This was attributable to the enhancement initiatives carried out and tenant mix improvements for Gurney Plaza, East Coast Mall and the Mines.

We note that Sungai Wang Plaza also experienced a rise in shopper traffic by about 3% y-o-y in 3Q16, attributed to the introduction of new tenants and enhancement initiatives carried out, including the extension of its unique food & beverage cluster and introduction of the toys and hobbies cluster. We are positive on this development as it signals an improvement in CMMT’s malls popularity, specifically Sungai Wang Plaza.

Management plans to carry out asset-enhancement works for Gurney Plaza and Tropicana City Property with an estimated budget of RM30 million. The enhancement work will be carried out in stages in FY16, with a targeted full completion by 4QFY16. We believe this will contribute positively to overall rental reversion in FY16/FY17.

The soft retail spending outlook may impact CMMT, as it is largely retail-focused. Tenants’ capacity to absorb rental increases may be affected by their lower sales, and this would negatively impact CMMT as it also derives 3% to 4% of its top-line from turnover rent. — AllianceDBS Research, Oct 21

This article first appeared in The Edge Financial Daily, on Oct 24, 2016. Subscribe to The Edge Financial Daily here.