- We are upgrading Capitamalls Malaysia Trust (CMMT) to a BUY, with a higher fair value of RM2.15/unit vs. RM2.00/unit previously, based on a DCF valuation. This follows the potential injection of Queensbay Mall, which is set to enhance CMMT’s future earnings outlook.

- We believe this is the start of an extended upward re-rating cycle, driven by Queensbay Mall’s position as a ready and yield- accretive asset. Our BUY conviction rests on the following:- (1) CMMT’s first-mover acquisition advantage, among the retail REITs, given stabilisation of rental yields at Queensbay Mall. (2) Given the active tenant remixing and asset enhancement initiatives, the Mall has achieved an over 20% rental reversion since CMA’s acquisition. Current rentals stand at c.RM6psf vs. RM5psf previously, with occupancy standing at c.95%. (3) No cannibalisation between Queensbay Mall and Gurney Plaza, despite being in Penang. Both are located at different affluent locations in Bayan Lepas and Georgetown, respectively. (4) The pre-emptive mandate to issue more shares of up to 353.6mil hints of the potential acquisition of Queensbay Mall. (5) Gearing is manageable at 28% as at end-FY12, suggesting room for additional debt. Thus, CMMT is likely to acquire Queensbay Mall via a mix of debt and equity funding.

- Putting things into perspective, based on our 5.5% implied cap rate, the acquisition price and capital value of Queensbay Mall are estimated to be at RM818mil and RM594psf, respectively.

- We are maintaining our FY13F estimates, but have revised our FY14F and FY15F earnings to RM184mil (+18%) and RM194mil (+5%), respectively. Potential acquisition of Queensbay Mall is expected to complete next year and contribute meaningfully to the bottom line from FY14F onwards. The average rental is projected at RM6.18psf with an occupancy rate of 95%.

- Our model assumes a 50:50 ratio of debt and equity funding. Gearing continues to be manageable at 33%, below CMMT’s internal gearing threshold of 40%. The acquisition which is likely to be funded partly by debt will be accretive to overall DPU, given CMMT’s lower average cost of debt of 4.7% than our implied cap rate of 5.5%.

- Post injection, accretion to DPU is visible, rising to 10.4sen and 11.0sen for FY14F and FY15F, respectively, from its pre-injection DPU of 9.4en and 10.0sen.

- CMMT now trades at higher distribution yields for FY14F and FY15F, respectively, at 5.4% and 5.7% vs. 4.9% and 5.3% for PREIT. In addition, we are of the view PREIT’s distribution yields have normalised at current levels, given that the significantly stronger earnings have been priced-in by the market.

Source: AmeSecurities