- We are downgrading Capitamalls Malaysia Trust (CMMT) to a HOLD with a lower fair value of RM1.50/unit (from RM2.15/unit previously), based on our DCF valuation, following a downward earnings revision and rising long bond yields.

- We updated FY13 numbers and trimmed our earnings by 28%-32% over FY14F-FY15F to remove earnings contribution from Queensbay Mall given that the acquisition did not materialise and to incorporate higher operating expense assumption.

- We expect organic growth as there are no signs of accretive acquisitions in the near term. We have new FY14F earnings of RM154mil, RM160mil for FY15F, and RM170mil for FY16F.

- CMMT’s 1QFY14 distributable income of RM41mil (+6.6% YoY) and DPU of 2.32sen (+6.4% YoY) were in line with our and consensus expectations. This accounted for 27% of our estimate and 26% of consensus.

- The underlying strength of CMMT’s strong revenue growth was the on-selling of electricity at The Mines and full-quarter contribution from newly-configured units at East Coast Mall under phase 1 of the asset enhancement initiative (AEI).

- CMMT continued to sustain positive rental reversion, at an average of +1%. Gurney Plaza achieved +7%, Sungei Wang Plaza -6.3%, The Mines +11.3%, and East Coast Mall +10.4%. Overall portfolio occupancy remained high at 99%.

- As expected, operating cost surged by 16% in tandem with rising utility and assessment fees, coupled with higher electricity consumption.

- The negative rental reversion at Sungei Wang did not come as a surprise. While the construction of Bukit Bintang MRT is currently affecting shopper traffic, it is expected to normalise when the MRT is completed in FY17.

- Nonetheless, we are concerned over the impact of Sungei Wang’s negative rental reversion (-6.3% currently vs. -3.7% in 4QFY13 and -0.7% in 2QFY13) on CMMT’s overall portfolio. Compared to 4QFY13, CMMT’s gross revenue rose by a marginal 0.2%. That said, consistent AEIs undertaken by CMMT, particularly for East Coast Mall, should provide support and balance its portfolio.

- CMMT had embarked on the next phase of AEI for East Coast Mall with completion by end-FY14. Gurney Plaza and The Mines will undergo AEIs in the 2HFY14 (see table 2). .

- We see rising long bond yields as an upside risk. CMMT’s current distribution yield is 6.1% FY14F – yield spread of c.200bps vs. SREIT’s c.400bps.

Source: AmeSecurities