- We reaffirm our HOLD recommendation on Capitamalls Malaysia Trust (CMMT) with an unchanged fair value of RM1.50/unit, based on our DCF valuation.

- CMMT reported 1HFY14 distributable income of RM81mil (+5% YoY) and DPU of 4.53sen (+1.6% YoY), which were within our and consensus expectations (comprising 52%).

- The stronger 1HFY14 revenue were driven by:- (1) higher rental rates from new and renewed leases; (2) newly reconfigured units at Phase 1 of East Coast Mall; and (3) on-selling of electricity to tenants at The Mines.

- The portfolio occupancy remained high at 98.4% while CMMT achieved a blended positive rental reversion of +2.3%. Gurney Plaza achieved +7.1%, Sungei Wang Plaza -7.4%, The Mines +8.6%, and East Coast Mall +13.7%.

- Average rental rates are:- Gurney Plaza (RM8+psf), Sungei Wang Plaza (RM10+psf), The Mines (RM6+psf) and East Coast Mall (RM6+psf).Service charge remains unchanged for now as CMMT is in the midst of deciding on whether to pass on the electricity and assessment fee hikes to tenants.

- 18% of CMMT's net lettable area will be up for reversion, with the bulk arising from Gurney Plaza at 7%.

- Sungei Wang Plaza’s negative rental reversion is viewed to have a short-term impact. The dip in shoppers’ traffic will persist throughout the construction period of the Bukit Bintang MRT. We expect this to normalise once construction completes in 2017.

- Nonetheless, we believe the slew of asset enhancement initiatives (AEIs) undertaken for its other portfolio would improve operational efficiencies and in turn, support CMMT’s overall portfolio rental reversion, amid the weaker rental trend for Sungei Wang Plaza.

- Majority of FY14’s AEIs are spent on East Coast Mall (+20k to 30ksqft of NLA). CMMT is embarking on Phase 2, which involves the extension of the al-fresco area and reconfiguration works. This is expected to be completed by end-FY14. Its Phase 1 AEIs is contributing positively as net property income grew by 7% YoY.

- The impact of higher interest rate is mitigated by the fact that 71% of debts are under the fixed rate. Average cost of debt currently stands at 4.3%. Gearing level is comfortable at 29% as at end-1HFY14.

- Given there is no sign of visible acquisitions in the pipeline, CMMT is expected to continue charting organic growth. There are no changes to our earnings forecasts and HOLD call. CMMT currently trades with a distribution yield of 6.2%, with a200bps yield spread over the 10-year Malaysia Government Securities.

Source: AmeSecurities