News

CMMT has received a letter of intent from Tropicana Corporation Berhad ("TCSB"), offering CMMT the opportunity to explore the acquisition of: (1) A four storey shopping mall known as Tropicana City Mall ("TCM"), and (2) A twelve storey office building known as the “Tropicana City Office Tower”.

With the signing of the letter of intent, an exclusive period for the due diligence will be granted to CMMT and upon being satisfied with the results, CMMT shall proceed to enter into negotiations on the terms for the proposed acquisition.

The letter of intent does not constitute any legal binding obligation between TCSB and CMMT to proceed with the Proposed Acquisition until the execution of a definitive and binding agreement.

Further details will be announced at the appropriate time.

Financial impact

Uncertain, given the asset yield and pricing have yet to be finalised.

Pros / Cons

Opportunity to enhance yield. While we have no information regarding the yield, we believe CMMT would likely strike a deal only if it its yield-accretive, given its track record in the past.

A good fit. We like TCM given its prime location in the affluent suburb of Petaling Jaya, and its positioning as a neighbourhood shopping mall, which fits well with CMMT's portfolio composition.

Yield is an undeniable hurdle. CMMT's stable of four malls currently enjoy an asset yield ranging from 6.6- 6.9%, following a number of asset enhancement programs. Our potential concern is whether TCM can match this asset cap rate, and what CMMT can do to help improve asset yield, given our estimate that the mall is already running close to 100% occupancy rate.

Risks

Limited portfolio diversification and internal pipeline; intensifying competition; exposure to rising inflation.

Forecasts

Maintained.

Rating

Maintain HOLD

Positives: Imports best practices from the CapitaLand Group; favourable macro-economic conditions.

Negatives: Highly specialised portfolio accentuates risk exposure to the retail segment.

Valuation

We believe M-REIT yields are trending towards 2011 levels (Figure #1), and thus raise target DY to 6.0% from 5.0%, and trim our TP from RM1.70 to RM1.41.

Source: Hong Leong Investment Bank Research - 26 Aug 2013