CapitaMalls Malaysia Trust; Buy; RM1.57
Price Target: RM1.95; CMMT MK

A local news daily reported that CapitaMalls Malaysia Trust (CMMT) may be acquiring Tropicana City Mall, a 436,447 sq ft NLA mass market mall in Petaling Jaya, and its adjacent 101,246 sq ft office block, at an expected price of RM550-650m. The mall itself is surrounded by a large catchment of middle-income residences as well as well-taken up condominium units. Based on the expected price, this would constitute a 9-29% premium to the mall and office’s current book value of RM503m as at Sep 2012’s valuation date. We think it is more likely that CMMT would purchase just the mall, given the Capita brand’s preference to segregate REITs according to asset types.

While we think Tropicana City Mall’s earnings prospects are resilient given its large catchment area, the main determinant of the potential transaction would still be valuations. The current book value of the mall is at RM1011psf, compared to RM870psf at The Mines and RM1731 at Sunway Pyramid. Current capitalisation rates used for mall valuations range between 6-7% for most REITs, though there is a possibility transactions may be lower than this. CMMT certainly has the means to fund the transaction, as it only has 28% gearing (up to RM700m in debt headroom) and has received approval from Bursa for authority to issue up to 354m units (at current prices would amount to c.RM555m).

We are positive overall on the potential acquisition due to Tropicana City Mall’s dominance in the SS2 area (we understand nearby SS2 Mall is still underperforming), but would be cautious in the absence of more information regarding Tropicana City Mall’s income yields. Maintain BUY with RM1.95 price target.

Source: HwangDBS Research - 20 Aug 2013