CMMT earnings expected to rebound from FY19

CapitaLand Malaysia Mall Trust (Jan 3, RM1.02)

Maintain buy with a lower target price (TP) of RM1.32: We believe that CapitaLand Malaysia Mall Trust’s (CMMT) share price is oversold at current levels. We cut our financial year 2019 to 2020 forecast (FY18-20F) earnings by 4% to 13% due to asset enhancement initiatives at Sungei Wang Plaza (SWP).

However, we think the stock’s approximately 29% fall in 2018 has more than accounted for SWP’s temporary weakness. The share price is now near all-time lows (94 sen) last seen when it was listed in 2010 and trading at 0.8x net asset value (NAV) of RM1.31 per share.

Entry at these levels will provide a sustainable 7% dividend yield, the highest in our Malaysian real estate investment trust (REIT) universe, and potential capital appreciation on completion of SWP’s asset enhancement initiative (AEI).

In our view, CMMT’s share price implies that SWP has been completely discounted from its current market value: the 23% discount to NAV is equivalent to RM620 million, higher than SWP’s asset valuation of RM545 million.

We believe this excessively discounts the value of the asset, as we expect a rejuvenation of SWP’s earnings on completion of the asset enhancement works by the end of the first half of 2019.

Potential catalyst includes stronger-than-expected rental reversion and better occupancies would lift earnings. SWP and The Mines Shopping Mall are at below 90% with room to rise, while rental rates have upside potential in view of impending AEIs.

Key risk to our view is the drop in consumer sentiment. The soft retail spending outlook may impact CMMT, as it is largely retail-focused.

Tenants’ capacity to absorb rental increases may be affected by their lower sales, and this would negatively impact CMMT as it also derives 3-4% of its top line from turnover rent.

Given the tough operating environment in the retail sector, we have priced in low rental reversions for the Klang Valley malls with average rental growth for the portfolio at 0.7%/2.9%/2.8% for the forecast of financial years 2018/2019/2020 (FY18F/19F/20F). 

We have also lowered our portfolio occupancy to 88%/92%/94% for FY18F/19F/20F from 96%/96%/96% previously as we account for lower occupancy in the Klang Valley malls.

We expect fourth quarter of 2018 (4Q18) earnings to likely still reflect low SWP contributions from the AEI works.

However, we project CMMT’s earnings to bottom out in FY18 and rebound from FY19 onwards on the opening of Jumpa in second half of 2019 (2H19).

Earnings should improve further in FY20 supported by the full-year contribution of Jumpa.

We maintain our “buy” call on CMMT with lower TP of RM1.32. The stock offers attractive dividend yields of approximately 7.1% for FY18. Total returns come up to 38.1%. — AllianceDBS Research, Jan 3

This article first appeared in The Edge Financial Daily, on Jan 4, 2019.

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