CapitaLand Malaysia Mall Trust (March 19, 99 sen)
Maintain outperform with a lower target price (TP) of RM1.35: The share price of CapitaLand Malaysia Mall Trust (CMMT) has declined 30% year to date and is below the initial public offering price of RM1.08 (in 2010). We believe investors were concerned about the oversupply of retail spaces in the Klang Valley which resulted in the following: Sungei Wang Plaza’s negative reversions of -16.9% (which has improved from -30% since financial year 2015 [FY15]), and negative reversions at The Mines due to consolidation of tenants at the Digital Mart. We had previously accounted for this, expecting negative reversions at Sungei Wang Plaza (-20%) and The Mines (-5%), and mid-single digit reversions for CMMT’s other assets.
Asset enhancement initiatives may see some rental downtime. Our meeting with management indicates that they are actively addressing the currently challenging landscape by rejigging their tenant mix strategy. We note that its weaker assets (Sungei Wang Plaza, The Mines and Tropicana City Mall), are seeing reconfiguration of tenants space from the “large anchor tenants” into more themes and concepts, which create a variety of niche tenants; this helps to address the common saying nowadays of “all malls are the same”. All in, we maintain our capital expenditure assumptions of RM70 million to RM50 million in FY18 to FY19 as we have accounted for this, but we believe the malls may see some rental downtime during this period. Management expect most of the AEIs to be completed by second half of 2019, and we conservatively assume full effects of the AEIs will only be felt from FY20 onwards.
We lower our FY18 estimates (FY18E) and FY19E gross distribution per unit to eight sen and 8.1 sen (from 8.8 sen and 8.8 sen).
Valuations attractive at (8.%/7.2% gross/net yield). CMMT’s yields are also attractive post trimming earnings and widening our valuation spreads by 50 basis points (bps) for all Malaysian real estate investment trusts (MREITs) under our coverage . Our spread for CMMT is the widest among retail MREITs under our coverage at 1.9 percentage points (ppt), and on par with SUNREIT which also faces asset weakness from the office and hotel segments. However, CMMT’s gross yields are better than all retail MREITs under coverage range of 4.8% to 6.5%, while its price-to-book value (PBV) is the lowest at 0.76 times (versus. MREITs peers of 0.83 times to 1.42 times).
We reiterate our “outperform” call but lower our TP based on a lower FY18E gross dividend per share and net dividend per share of eight sen and 7.2 sen (from 8.8 sen and 7.9 sen), and a higher spread of +1.9ppt (from +1.4ppt) as we are factoring in temporary risk premiums to address concerns of overnight policy rate hikes, and maintain our 10-year Malaysian Government Securities outlook of 4% (versus current levels of 3.9%). Our applied spread is the highest among retail MREITs under our coverage (+1.3ppt to 1.9ppt) due to weaker reversions at CMMT’s assets and perceived earnings risk. Even assuming significantly more conservative earnings and valuations, CMMT remains attractive, warranting a strong “outperform” call at current levels. — Kenanga Research, March 19
This article first appeared in The Edge Financial Daily, on March 20, 2018.