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IPO : CapitaMalls Malaysia Trust (Inter-Pacific Research); fair price RM1.00

Largest ‘Pure Play’ Shopping Mall REIT

Highlights:

? Valuation: Our fair value is RM1.00 which is at a 5% discount based on our DCF of RM1.06 per share, but at a slight premium against current retail price of RM0.98 using DDM valuation. Our fair value implies P/NAV of 0.98X which is at a slight premium against average P/NAV of Malaysia’s REIT.

? CapitaMalls Malaysia Trust(CMMT) distribution yield of 7.5% is one of the lowest among all REITS: The 7.5% distribution yield in FY11 is based on a projected DPU of 7.45sen, payout ratio of 100% and assumed pricing of RM0.98 per unit. CMMT plans to adopt annual distribution payout policy of at least 90% of its distributable income. But they will ration 100% payout for the 1 2 financial years upon listing.

? Matured prime assets: CMMT assets assume the geocentric of business, retail and tourism activities: (1) Sungei Wang Plaza located at the established Bukit Bintang shopping district; (2) Gurney Plaza strategically situated on the well known seaside promenade within 4km from the KOMTAR and ferry terminal; and (3) The mines located at the Mines resort city mixed development with large population catchment of numerous residential neighbourhoods.

? First right of refusal (ROFR) to acquire CMA’s properties: The manager of CMMT will be granted ROFR to acquire future retail properties held by CapitalMall Asia, one of the leading shopping mall owner, developer and manager in Asia.

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? CapitalMalls Asia (CMA) will hold 41.7% of CMMT: CMMT approved fund size is 1.35bn units. By assuming the unit price at RM1.00, its total market capital will be RM1.35bn, which will be the 2 largest REIT in Malaysia after Sunway REIT. CMA will retain 563.4mn units or 41.7% of total issued units. Retail investors will be offered 67.5mn or 5%, while institutional investors 719.02 or 53.3%. Nonetheless, the proposed offering of 786.52mn was granted over allotment option of 15%, whereby CMA will retain only 41.74% in the event 15% over allotment option are exercised.

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? Asset portfolio worth RM2.13bn: CMMT plans to acquire RM2.13bn worth of properties from CMA. The purchase consideration of RM2.05bn will be satisfied via public issuance of 1.33bn units and RM750mn bank facilities. Thus, gearing level will reach 34% upon listing, still below SC’s threshold limit of 50%. Purchase consideration of RM2.05bn is at a slight discount by 3.8% against the actual valuation of all assets that comprise of 3 shopping malls i.e. Gurney Plaza, Sungei Wang Plaza and The Mines.

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STRENGTH

? CMMT will leverage on CMA’s extensive network of strategic and local partners: CapitallMalls Asia Limited is one of the largest shopping mall developer, owner, and manager in Asia with its presence in 5 countries, 48 cities, 87 retail properties -- S$20.4bn total property value rented out under 7,700 leases. They would benefit from CMA’s extensive relationship with international and Malaysian tenants. Also, the manager has access to CMA integrated retail and capital management platform which is supported by 2,844 total staffs as at 31 Dec’09 and Malaysian team of 169 employees. Th e platform provides CMMT with a competitive advantage by allowing the manager to capitalize on its real estate knowledge and capital management expertise of both its regional and Malaysian staff and ill assist the manager in sourcing potential acquisition and also managing operations of the properties.

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? Proven track record of existing properties: CMA has accomplished significant asset enhancement initiatives via the configuration of retail units, improvement in tenant mix, conversion of ancillary areas into productive retail space and other proactive assets management measures. This saw them successfully enhance and rebranded their ‘The Mines’ as well as coveted low-yielding anchor tenants space into high yielding specialty outlets like the Sungei Wang Plaza property.

? Right of first refusal: CMA has granted CMMT a ROFR over Gurney Plaza extension. Gurney Plaza extension is a nine storey retail extension block adjoining Gurney Plaza, with NLA of approximately 135,000 sq ft which is about 19.1% of the existing building. CMMT gearing stands at 34%. Assuming the acquisition cost of RM162mn for Gurney Plaza extension and the proportionate to current valuation for Gurney Plaza is RM850mn, hence CMMT will be able to gear up by another 7.4% to bring its total gearing to 41.4% to secure the acquisition via inorganic growth.

? Quality assets located in geographically diversified large population catchment areas and are accessible to a broad range of consumer target markets: Gurney Plaza, Sungei Wang Plaza and The mines are all located in strategically populated catchment areas with the population size of 520,600, 293,400 and 271,400 respectively. In 2009, the properties managed to secure shopper traffic of 41.7mn.

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? Diversified and resilient shopping mall portfolio offers income stability to investors: The percentage contribution to FY09 gross rental income from Gurney Plaza, Sungei Wang Plaza Property and The Mines are 37.2%, 34.2% and 28.6% respectively. In addition, as at 30th April 2010, the subject properties ha ve more than 1,000 leases represented by a diversified and well balance trade mixture, with no single tenant contributing to more than 5.9% of the portfolio’s monthly gross rental income. It indicates absences of over reliance on any single shopping mall or single tenant.

RISK

? Increase competition from other retail properties or between retailers can have adverse effect on CMMT’s financial condition: Retail industry is competitive with increasingly older shopping malls upgraded and refurbished, and new shopping malls entering into the market. Supply of new retail space in Kuala Lumpur is expected to increase by 1.9mn sq ft in 2010, followed by another 0.4mn sq ft in 2011, while in Selangor the supply of new retail space is expected to increase by 1.7mn sq ft in 2010 followed by 0.7mn sq ft during 2010. As for Penang, supply of new retail space will increase by 0.7mn sq ft during 2010. The additional retail space coming on stream will raise competition with the income and market value of the property depending largely on the ability of the properties to compete with other shopping mall in enticing new tenants while retaining existing tenants.

? CMMT owns 61.9% of the aggregate retail floor area in Sungei Wang Plaza: Being unable to control the trade and tenant mix of the remaining aggregate retail floor area of Sungei Wang Plaza results to duplication of similar products offering within the property. This can have a material adverse condition amongst the Sungei Wang Plaza property’s tenants. Lack of control and rights to manage the common areas of Sungei Wang Plaza will erode income generation. Although CMMT will have 62.8% of the voting rights with Sungei Wang Plaza Management Corporation, CMT lacks full control over the management corporation. This means in practice they still need some level of consensus from the minority parcel owners to be able to execute any proposal that requires their financial contribution or cooperation. If CMMT is unable to obtain the consensus or cooperation from the minority parcel owners, it will not be unable to execute strategies which is believed to be at the best interest of Sungei Wang plaza

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? Lease amounting to 43.5% of CMMT’s gross rental income as at 30 Apr 2010 will expire in 2011: The concentration of lease expires heightens CMMT’s exposure to risk associated with (1) rising vacancies should there be an increase in non-renewal of leases; (2) drop in occupancy rates; and (3) lower rental income more so if the economic condition remains weak in 2011 as it can put a lid on their 2011 gross rental income forecast.


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