News

• CMMT has entered into sale and purchase agreements for the acquisition of Tropicana City Mall and Tropicana City Office Tower for a total purchase consideration of RM540m from Tropicana City Sdn Bhd.

• Tropicana City Mall is a freehold commercial property, approximately 6 years of age and has total NLA of 448,248 sq ft. Together with the office tower, it has 1,759 car parking bays and the mall’s occupancy rate is currently 89.2%. The office tower on the other hand comprises of 101,246 sq ft NLA and currently fully occupied.

• The proposed acquisitions of the properties are expected to be completed in 3QFY15.

Highlights

• Recall back on 23 August 2013, Tropicana City Sdn Bhd offered CMMT the opportunity to explore on the above acquisitions. However on 29 October 2013, CMMT decided not to pursue this acquisition given that both parties are unable to mutually agree on the terms of agreements.

• We are positive on the news given the quality of the properties such as located in the intersection of two major highways (Sprint Highway and LDP), close proximity from established and affluent residential neighbourhood and also established tenant mix with high occupancy rates.

• We are also positive as the new assets annualised cap rate of 7.2% is relatively high assuming full year contribution of RM38.9m to its topline revenue and will be yield accretive.

• Management intends to fund the acquisitions through debt and/or equity fundraising whereby the combination will be determined at a later stage.

Risks

• Limited portfolio diversification (in terms of market segment as it is pure retail) and internal pipeline.
• Intensifying competition in super-prime Bukit Bintang area.
• Exposure to rising inflation.
• Disruption in visitors due to KVMRT construction works.

Forecasts

• Assuming three months revenue contribution for FY15 and full year contributions for FY16 and FY17, we revise our DPU assumptions to 8.7sen, 10.3sen and 11.0sen respectively (previously 9.0sen, 9.6sen and 10.3sen).
• Our revised forecast premise on the assumptions that the acquisitions will be entirely funded by debt, which will results in net gearing ratio increase from 24% in FY14 to 34% in FY15; pending further update from management.

Rating

HOLD , TP: RM1.61

Positives

• Imports best practices from the CapitaLandGroup and beneficiary of sustained (albeit slower) consumption growth.

Negatives

• Highly specialised portfolio makes CMMT themost sensitive to adverse changes in the retail segment.

Valuation

• Maintain HOLD with a higher TP of RM1.61 (previously RM1.50) as we take into account the acquisitions.
• Targeted yield remains unchanged at 6.4% based on historical average yield spread of CapitaMalls Malaysia Trust’s and 7-year MGS.

Source: Hong Leong Investment Bank Research - 27 Jan 2015