The REIT’s  2QFY14 results were in line with expectations.  It declared a2.21-sen  dividend  for  the  quarter.  Its  East  Coast  Mall  in  Kuantan, currently under major renovation, may remain as its main growth driver,going  forward.  Management,  however,  remains  cautious  over  its tenants’  sales  growth  in  the  run-up  to  the  implementation  of  GST. Maintain NEUTRAL, with our FV at MYR1.41.

Within  estimates.  CapitaMalls  Malaysia  Trust’s  2QFY14  net  profit  of MYR36.7m (+0.8%  y-o-y;  -4.0% q-o-q)  brought  its  1HFY14 net profit to MYR74.9m  (+3.7%  y-o-y),  in  line  with  our  forecasts.  It  declared  adividend of  2.21  sen  for the  quarter,  in line with  our  estimate.  Revenue growth  was  attributed  to  positive  rental  reversions  kicking  in,  the completion  of  refurbishment  at  Phase  1  East  Coast  Mall’s  (ECM)  andincome  from  the  on-selling  of  electricity  to  tenants  at  The  Mines.  The REIT’s average  YTD  rental reversion  improved  slightly  to 2.3% (1Q14:1.0%),  while  its  portfolio  occupancy  rate  was  stable  at  98.4%.  It  also recognised a revaluation gain of MYR68.2m on its assets in 2QFY14.

ECM  to drive growth.  We believe that ECM  in Kuantan  will remain as CapitalMall Malaysia Trust’s  main earnings growth driver. YTD, the mall has  recorded  positive  rental  reversions  of  13.7%.  Meanwhile, refurbishment  works  are  still  ongoing,  with  completion  scheduled  foryear-end. The  exercise  involves capex of  MYR60m,  with  a high  singledigit ROI. While management has brought in well-known tenants such as Uniqlo  and  Birkenstock  into  ECM,  it  remains  cautious  on  overall  sales prospects. Its  portfolio  tenants have been posting flat  sales growth,  and the REIT expects  growth to slow  leading  up to the implementation of the Goods and Services Tax (GST) in April 2015.

Expenses still manageable. Management believes that it would be able to absorb all additional costs  from this year’s  electricity tariff  hike.  On a positive  note,  Kuala  Lumpur  City  Hall  recently  revised  its  assessment rate hike to only 25% (from 100%), thus giving  rise to some cost savings for  Sungei Wang Plaza.  The recent  interest rate hike should not have a major impact on the REIT, as 71% of its debt is on fixed rates.

Still  NEUTRAL. We raise our FY14/FY15F  net profit  by a marginal  <1% on  revising our expenses assumptions.  Our  DDM-based FV  remains  at MYR1.41. The REIT’s current net yield of about 6% looks decent.

Source: RHB