The group’s prospects will continue to be buoyed by its Penang portfolio, while it is making efforts to turn around its Klang Valley assets, although they are unlikely to sway earnings meaningfully in the near-to-medium term. We opine a re-rating will hinge on the progress on its portfolio rationalisation. We maintain our forecasts, TP of RM0.58 and MARKET PERFORM call.

We came away from a recent engagement with CLMT feeling mixed on its prospects. The key takeaways are as follows:

1. Penang focus. In the immediate term, the group will continue to focus on its malls in Penang (i.e. Queensbay Mall (QBM) and Gurney Plaza) which contributed to 76% of its total income in FY23 (with the balance coming largely from East Coast Mall, Kuantan). In view of a booming economy in Penang driven by FDIs and the roll-out of various mega public infrastructure projects, we believe this should allow for more favourable rental reversions in the near-to-medium term given that the occupancy rate for these assets are nearly 100%.

2. Heightened competition in KL. There is much room for improvement for its malls in the Klang Valley. The Mines was the only mall that was able to generate positive cash flows in FY23 while Sungei Wang and 3 Damansara were still in the red. Not helping either is competition for footfall posed by new and upcoming shopping malls such as Exchange TRX, Pavilion Damansara Heights (Phase 1), Merdeka Mall 118 and Pavilion Damansara Heights Phase 2. On a brighter note, the occupancy at Sungei Wang picked up to 87.2% in Dec 2023 with new tenants (vs. 78.4% in Sep 2023).

3. May expand foothold in Johor. It is evaluating opportunities in Johor, having recently acquired various industrial assets in the state.

Forecasts. Maintained.

Valuations. We also maintain our TP of RM0.58 based on an unchanged target yield of 7.5% (derived from a 3.5% yield spread above our 10-year MGS assumption of 4.0%). The yield spread is on the higher range applied within our sector peers (average 2.0%) owing to the group’s less optimum assets in the Klang Valley. There is no adjustment to our TP based on ESG which is given a 3-star rating as appraised by us (see Page 4).

Investment case. CLMT will likely continue to see solid performances from its Penang assets, namely QBM. However, its less prime asset profile amid weakened consumer spending and incoming shopping mall supplies may put a strain to its retail-centric portfolio for its Klang Valley assets (namely Sungei Wang and 3 Damansara). Maintain Market Perform.

Risks to our call include: (i) elevated risk-free rate, weighing on REIT valuation, (ii) lower-than-expected rental reversions, and (iii) lower-than- expected occupancy rates.

Source: Kenanga Research - 20 Mar 2024