CapitaLand M’sia Mall Trust - 9M18 Within Expectations

Date: 25/10/2018

Source  :  KENANGA
Stock  :  CMMT       Price Target  :  1.25      |      Price Call  :  BUY
        Last Price  :  1.05      |      Upside/Downside  :  +0.20 (19.05%)

9M18 realised distributable income (RDI) of RM120.9m came in within expectations at 74% and 78% of ours and consensus, respectively. No dividend, as expected. Maintain FY18-19E CNP of RM164-165m. Portfolio reversions were also within our expectations of low single-digit to mildly negative. Maintain OUTPERFORM and TP of RM1.25 given current gross yields of 7.2-7.3% in FY18-19E.

9M18 realised distributable income (RDI) of RM120.9m came in within both our and consensus expectations at 74% and 78%, respectively. No dividend, as expected.

Results highlight. YoY-Ytd, top-line was down by 4.9% due to; (i) downtime from asset enhancement works at Sungei Wang Plaza (SWP), The Mines (TM), East Coast Mall (ECM) and Tropicana City Office Tower, (ii) lower occupancy at SWP, TM and 3 Damansara (3D, previously known as Tropicana City Mall), and (iii) lower rental rates at SWP and TM. Although there were positive reversions at Gurney Plaza (GP) and ECM, it was not sufficient to cover the topline weaknesses. All in, RDI declined by 4.5% despite higher operating cost (+3.8%) from higher assessment fees, marketing expenses and staff costs, which were offset by lower expenditure (-4.2%). QoQ, 3Q18 top-line was down slightly by 1.4% due to similar reasons mentioned above, while marginally higher operating cost (+1.2%), and higher financing cost (+1.1%) caused RDI to decline by 4.8%

Outlook. Management plans to spend c.RM70-50m on capex in FY18- 19 for refurbishment of Sungei Wang Plaza, TM, East Coast Mall (ECM) and Gurney Plaza (GP). As at Sept 2018, FY18 will see 15.4% of NLA expiring, while we estimate c.30% of NLA expiring in FY19; note that CMMT’s lease expiries are on a staggered basis of c.30% p.a. SWP may see weak rental reversions in the near term of which we have already accounted for in our forecasts, but we expect it to continue recovering on: (i) improved mall accessibility now that the MRT1 is operational, and (ii) post completion of the AEIs by 2H19.

Maintain FY18-19E of RM164-165m. We expect low single-digit to mildly negative reversions on leases expiring. Our FY18-19E GDPU/NDPU of 8.0-8.1/7.2-7.3 sen implies gross yields of 7.2/7.3% (net yields of 6.5/6.6%).

Maintain OUTPERFORM and TP of RM1.25. We reiterate our OUTPERFORM call and TP based on FY19E GDPS/NDPS of 8.1 sen/7.3 sen, on an unchanged +2.10ppt spread to the 10-year MGS target of 4.20%. Our applied spread is +0.5SD above historical average to serve as a buffer for near-term fluctuations to the MGS on oversupply concerns as well as potential interest rate hikes. We are comfortable with our OUTPERFORM call as we have adopted conservative assumptions and have priced in most downside risks into CMMT’s earnings and valuations, while there is recovery potential from better reversions in the longer run, especially post AEIs. At current levels, CMMT is commanding attractive gross yield of 7.3% in FY19E (vs. average of large cap retail MREITs of 6.0%).

Risks to our call include: (I) bond yield expansions, (ii) lower-than- expected rental reversions, and (iii) lower-than-expected occupancy rates.

Source: Kenanga Research - 25 Oct 2018

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