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CMMT is largest 'pure-play' retail REIT

CapitaMalls Malaysia Trust (June 13, RM1.17)
Initiating coverage at RM1.17 with fair value of RM1.21:
CapitaMalls Malaysia Trust (CMMT) was listed on the Main Market of Bursa Malaysia on July 16 last year. CMMT is the second retail-focused REIT established in Malaysia after Hektar REIT. CMMT is currently the second largest REIT in Malaysia behind Sunway REIT. To date, its total asset size stands at RM2.4 billion and as at the last closing price of RM1.17, the market cap stands at RM1.75 billion (versus Sunway REIT's RM3.8 billion and RM2.93 billion respectively).

CMMT currently has three assets in its portfolio — Gurney Plaza in Penang, Sungei Wang Plaza in Kuala Lumpur and The Mines in Seri Kembangan, Selangor. CMMT is managed by CapitaMalls Malaysia REIT Management Sdn Bhd, which is a joint venture by CMMT's sponsor, CapitaMalls Asia Ltd (CMA), one of Asia's largest listed shopping mall developers, and the Malaysian Industrial Development Finance Bhd. CMA is a major unitholder in CMMT and holds about 41.74% of the total units. Prominent institutions such as the Employees Provident Fund and Skim Amanah Saham Bumiputera also own notable stakes in CMMT, with current holdings of 8.7% and 6.7% respectively.

Investment case: (i) A strong, stable and ever-expanding portfolio; (ii) Low tenant concentration risks; (iii) Backed by a reputable and highly established sponsor with a proven track record in retail mall management; and (iv) Prudent capital management that suits rising interest rate environment.

The risks to our view include: (i) competition from other shopping malls in the surrounding areas; (ii) fast-growing inflation leading to higher inflationary risks; (iii) new entries into the REIT sector; and (iv) country risk.

We are estimating a 5% growth in average rental rates for FY11 and FY12, which is in line with the government's broad outlook on the Malaysia's economic growth and CMMT's average step-up rental rates. The acquisition of the Gurney Plaza extension in 1Q11 is also expected to contribute significantly to CMMT's income growth but the full extent of the earnings contribution will only be seen from FY12 onwards.

Our fair value estimate is RM1.21, based on a 7% target MREIT yield against our FY12 dividend per unit forecast of 8.5 sen. The 7% target yield is in line with the industry's average and our valuation methodology for other MREITs under our coverage (Axis REIT, Quill Capita and Sunway REIT). We initiate our coverage with a "market perform" rating. — RHB Research, June 13

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