News  CMMT proposed to undertake a placement of up to 299.6m units which would raise gross proceeds of approximately RM395.5m.

 Nonetheless, the terms of the placement such as; (i) number of placement units, and, (ii) placement price, are yet to be finalised.

 The proceeds will be utilized to finance the RM540.0m acquisition of Tropicana City Mall (TCM) and Tropicana City Office Tower (TCOT) from Tropicana City Sdn Bhd.

 The placement is conditional upon, (i) the proposed acquisition, and, (ii) increase in fund size to 2589.9m units, and is expected to be completed by end 3Q15.

Comments  We are slightly negative on the announcement as (i) the placement will dilute the FY15-16 DPU by 7.1-10.3% to 8.3- 8.7 sen, (ii) to recap, the asset acquisitions price tag of RM540.0m appears to be expensive given that it may not be DPU accretive as the implied FY15E yield of the combined assets is at 5.1% (based on 71% NPI margins), below the range of CMMTs other asset valuation cap rates (6.0%- 7.1%), and portfolio yield of 6.5%

 On the flipside, in the longer term (beyond FY16), we reckon that the asset acquisition will be DPU accretive as CMMT has proven its ability to turn around assets and improve ROIs significantly since they are able to rope in more reputable tenants which will further improve the mall’s efficiency.

 Additionally, we expect proceeds from the placement to reduce its FY15E net gearing to 0.36x (from 0.39x).

 Above all, the near to medium term impact is not overly DPU accretive and thus, investors will have to take a longer-term view on this acquisition.

Outlook  TCM and TCOT acquisitions and the placement, which are both inter-conditional, are expected to be completed in 3QCY15.

Forecast  We increase our FY15-16E earnings estimates by 8.6% and 4.8% to RM173.0m-RM182.0m, as a result of lower acquisition cost and interest expense, which will be funded by the placement proceeds. However, we lower DPU to 8.3 sen – 8.7 sen (from 8.9 sen – 9.7 sen) as a result of dilution from the placement.

Rating Maintain UNDERPERFORM

Valuation  We revised lower our TP to RM1.35 (from RM1.48) post dilution impact from the placement. We maintain UP as the acquisition does not appear to be DPU accretive in the near to medium term. Furthermore, FY15-16E net yields of 5.0% is less attractive than its peer average of 5.2%

 Our new TP is based on unchanged target gross yield of 6.3% (net: 5.7%) on a lower average FY15E-16E GDPS of 8.5 sen (from 9.3 sen). Our target gross yield is based on +2.10ppt spread to our target 10-year MGS of 4.20%.

 Note that we benchmark our TP on an average FY15-16E GDPS as we would like to encapsulate the new asset contributions as full asset contributions will only be felt in FY16.

Risks  (i) Bond yield compression, (ii) better than expected rental reversions at SWP

Source: Kenanga