CMMT has received a LOI from Tropicana Corp to explore the option of acquiring  Tropicana  City  Mall  (TCM)  and  Tropicana  City  Office  Tower. We  believe  that  at  the  right  valuation,  TCM  could  provide  a  boost  to CMMT’s earnings. Nonetheless, we maintain our SELL call, with a lower fair  value  of  MYR1.35  (from  MYR1.51),  as  we  see  further  downside  as bond yields continue to rise. 
 
- Letter  of  intent  received.  CapitaMalls  Malaysia  Trust  (CMMT) announced  last  Friday  that  it  has  received  a  letter  of  intent  (LOI)  from Tropicana City SB, a wholly-owned subsidiary of Tropicana Corp (BUY, TRCB  MK,  FV:  MYR2.34),  offering  it  the  opportunity  to  explore  the possibility  of  acquiring  Tropicana  City  Mall  (TCM)  as  well  as  Tropicana City  Office  Tower.  CMMT  has  four  weeks  from  the  date  of  the  LOI  to undertake  a  due  diligence  process  on  the  assets.  CMMT  has  indicated that it  would only  proceed  with  negotiations to acquire  the assets  if it is satisfied with the results from the exercise.  

- Acquisition could boost earnings. We believe that if the due diligence results are satisfactory, CMMT could consider acquiring TCM only, as it concentrates on retail assets, whereas its sister REIT, Quill Capita Trust -  also  part  of  the  CapitaLand  Group  (CAPL  SP,  NR)  -  focuses  on commercial  assets.  Based  on  TRCB’s latest annual report, TCM  has total net lettable area (NLA) of about 436k sqf. Assuming a valuation of MYR1,400–1,600 psf, TCM could be worth about MYR600–700m, which could  translate  into  total  incremental  revenue  of  about  MYR31–42m, assuming yields of about 5-6%. This could potentially help to mitigate the stagnating income  from  Sungei Wang  Plaza. With  its  current  gearing  at 0.28x, CMMT will likely fund its future acquisitions through a mix of debt and equity to avoid breaching the Securities Commission’s 0.5x gearing cap.

- Maintain  SELL.  Our  forecasts  are  unchanged.  We  maintain  our  SELL call, with a revised fair value of MYR1.35 (from MYR1.51) after widening our  COE  to  8.7%  (from  8.0%).  Although  the market  may  take  the  news positively  over  the  short  term,  downside  risks  to  the  MREIT  sector remain as bond yields continue to rise.

Source: RHB