Review

• CapitaLand Malaysia Mall Trust (CMMT)’s 1Q17 realised net profit of RM40.2mn came in within expectations, accounting for 24% and 23% of ours’ and the street’s full-year estimates respectively.

• 1Q17 distribution per unit (DPU) stood at 2.08sen (-1.9% YoY), which translates to an annualised dividend yield of 5.3% based on last closing price.

• YoY, CMMT’s 1Q17 net property income (NPI) decreased 1.5% to RM59.7mn as revenue dipped 1.3% YoY. The weaker performance was largely due to lower contribution from shopping malls in the Klang Valley, i.e. Sg Wang Plaza, Tropicana City Mall and The Mines.

• Rental reversion continued to show weakness in 1QFY17 as CMMT renewed 59 leases with a rental reversion of -12.4%. This was worse than the -2.4% reversion rate achieved in the same corresponding period last year. Negative rental reversion recorded at Sungei Wang Plaza continued to impact CMMT’s overall portfolio rental reversion. The Mines and Tropicana City Mall also saw negative rental reversions of -6.5% and 4.1% respectively, largely due to change in trade mix in an effort to rebalance the Malls’ tenant portfolio.

• In terms of lease expiry, 44%, 29% and 23% of CMMT’s leases by gross rental income are due for renewal in 2017, 2018 and 2019 respectively. For 2017, bulk of the renewal will come from Gurney Plaza, with 10% of the NLA representing 15% of gross rental income is up for renewal. According to management, the renewal negotiations are at an advanced stage.

Impact

• In view of the challenging market outlook, we cut: 1) average rental growth assumptions to 2% from 3% previously, 2) occupancy rates lower by 1-2% for the Klang Valley malls, and 3) blended NPI margin lower by 1ppt to 64%.

• Net impact to our FY17 and FY18 earnings is -3.4% and -2.0% respectively. Our FY19 forecast of 3.3% earnings growth is newly introduced.

Outlook

• Management foresees the retail industry to remain challenging as consumers tighten their belts amid this period of macro uncertainties. The retail landscape within the Klang Valley is facing strong headwinds and the impending completion of about 2.5mn sq. ft. of space (or 4.5% of existing space) by 1H2017 is expected to further intensify the competition level for retail malls. To ensure the competitiveness of the malls, CMMT will continue to embark in various asset enhancement initiatives and actively rebalancing the trade mix

of its mall. All in, management expects flat NPI and DPU growth in 2017.

Valuation

• Factoring in earnings adjustments and change in the valuation base year, we reduce our target price to RM1.72 from RM1.78 previously, based on DDM valuation and discount rate of 7.7%. We see near-term rental reversion to come under pressure due to rising competition in the retail space. Maintain Hold.

Source: TA Research - 19 Apr 2017