Capitaland Malaysia Mall Trust - Continue to be Strained by Klang Valley Malls

Date: 26/07/2018

Source  :  HLG
Stock  :  CMMT       Price Target  :  1.34      |      Price Call  :  HOLD
        Last Price  :  1.10      |      Upside/Downside  :  +0.24 (21.82%)

CMMT’s 1H18 core net profit of RM70.7m (-11.9% YoY) was broadly within ours and market expectations. Overall decrease in 1HQ18 was mainly due to downtime in SW, TM and ECM, and lower rental rates and occupancy contributed mainly by its Klang Valley malls. It was partially offset by improved performance from GP and ECM. We retain our forecast and maintain our HOLD call with unchanged TP of RM1.34 based on unchanged targeted yield of 6.0%.

Broadly within. 1H18 total revenue of RM177.1m (-3.9% YoY) translated into a core net profit of RM70.7m (-11.9% YoY). The results were broadly in line with both ours and consensus, accounting for 46% and 45%, respectively.

Dividend. Declared semi-annual dividend of 4.02 sen per unit (1H17: 4.14 sen), going on ex on the 6th August 2018.

QoQ & YoY. Revenue for 2Q18 of RM87.4m (-2.7% QoQ, -4.9% YoY) translated to core net profit of RM33.4m (-10.2% QoQ, -16.4% YoY). The decline was principally due to drop in revenue caused by downtime from asset enhancement initiatives (AEIs) works at Sungei Wang (SW), The Mines (TM) and East Coast Mall (ECM). Also, both rental rates and occupancy fell in SW, TM and 3 Damansara Property (3DP), slightly offset by higher contribution from Gurney Plaza (GP) and ECM. Property operating expenses increased (4% QoQ, 6.2% YoY) mainly due to rise of assessment fees at GP, and higher marketing expenses at 3D, nevertheless it was offset by one-off service charge rebate at SW.

YTD. Revenue for 1H18 of RM177.1m declined by 3.9% from RM184.3m in corresponding period 1H17. Essentially, the drop was contributed by (i) downtime from AEIs works at SW, TM and ECM, (ii) lower rental rates and occupancy were achieved at SW and TM, (iii) lower contribution from 3DP due to lower occupancy in 3 Damansara (3D) and tenant renovation downtime at the office tower. However, the decrease was slightly offset by higher rental rates from GP and ECM. Core net profit of RM70.7m showed a decrease of 11.9% from RM80.2m in 1H17, attributable to increase in property operating expenses and higher financial costs. The increased in property operating expenses was mainly due to (i) one-off additional property assessment fees for prior years as well as increase in current year’s assessment fees at GP, (ii) higher marketing expenses was incurred for renaming exercise at 3D (formerly known as Tropicana City Mall) and (iii) higher reimbursable staff costs. Meanwhile, the increase in finance costs was due to higher interest expenses post Overnight Policy Rate (OPR) hike in January.

Occupancy and gearing. CMMT’s occupancy rate declined in 2Q18 but remains decent at 91.7% (1Q18: 93.7%). Gearing remains unchanged at 32.9%.

Outlook. We expect better 2H contribution with new tenants coming into TM, ECM and SW. While we expect improved contribution from new initiatives and improvement works in SW, GP and ECM, we are still concern about the longer term oversupply issue in the mall environment.

Forecast. Maintain.

Maintain HOLD, TP: RM1.33. We maintain our HOLD recommendation with unchanged TP of RM1.34 based on targeted yield of 6.0% which is derived from 2 years historical average yield spread of CMMT and 10 year MGS. Despite the upside, we remain HOLD due to potential downside risk in DPU following the exit of an anchor tenant in SW.

Source: Hong Leong Investment Bank Research - 26 Jul 2018

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