CMMT announced the proposed acquisitions of Tropicana City Mall and Tropicana  City  Office  Tower  for  a  total  consideration  of  MYR540m. Maintain  NEUTRAL  with  a  revised  DDM-based  TP  of  MYR1.52  (7% downside).  We  believe  there  is  potential  to  be  unlocked  from  theseassets over the longer  term, although we expect DPU to only increase marginally in the short term.

Purchasing  Tropicana  City  assets.  CapitaMalls  Malaysia  Trust (CMMT) announced that it  has signed a conditional  sales and purchase agreement  (SPA)  for  the  purchase  of  Tropicana  City  Mall  (TCM)  and Tropicana  City  Office  Tower  (TCOT)  for  a  total  consideration  ofMYR540m.  CMMT  had  previously  considered  acquiring  these  assets back in Aug 2013, but  this was eventually called off due to  some pricing disagreements. Based on our calculations, the purchase price  translates into  a  rather  decent  gross  yield  of  about  7.2%.  The  acquisition  is expected to be completed sometime in 3Q15.  The REIT  is still exploring its  funding  prospects  for  the  acquisition.  As  such,  we  assume  for  now that the acquisition will be fully-funded through debt, which will increase its  gearing to  about 38%,  still  below  the  Securities  Commission’s  (SC)50% gearing cap.

Potential yet to be unlocked. The acquisitions are not expected to be a game changer over the short term, although there is still upside potential for the assets. TCM’s current rental rate is about MYR6.73 psf, which is subsantially  below  that  of  Sunway  Pyramid,  which  is  located  in  the vicinity  and  currently  commanding  rental  rates  of  above  MYR10  psf.Given  CMMT’s  recent  successful  revamp  of  the  East  Coast  Mall,  we believe TCM  still  has room for further growth  going forward. Meanwhile, we are not expecting exciting rental reversions from TCOT given the soft office  rental  market.  That  said,  the  incremental   earnings  from  these assets should help to offset Sg. Wang Plaza’s lacklustre earnings.

Earnings  forecasts.  We  increase  our  FY15-17  earnings  forecasts  by less than 5% as the incremental revenue from these assets will likely beoffset by the expected higher interest expenses.

Maintain  NEUTRAL.  We  lift  our  DDM-based  TP  to  MYR1.52  (from MYR1.35)  after  factoring  in  the  incremental  earnings  and  revised terminal growth of 1.75% (from 1%).  Dividend yield  for the REIT  is still decent at about 5.6%.

Source: RHB