This article first appeared in The Edge Financial Daily on April 19, 2017

CapitaLand Malaysia Mall Trust
(April 18, RM1.59)
Maintain hold with a lower target price of RM1.59: We met with CapitaLand Malaysia Mall Trust (CMMT) management and came out slightly negative on its near-term prospects.

Key takeaways from the meeting: i) Portfolio rental reversion should improve once the tenant reconfiguration and mass rapid transit Line 1 (MRT1) construction are completed; ii) Sungai Wang Plaza (SWP) and Tropicana City Mall (TCM) are undergoing tenant remixing to improve occupancy rates; iii) Tropicana City Office (TCO) should see full occupancy in the second quarter of 2017 (2Q17) as leases have been renewed; and iv) majority of the expiring leases in financial year 2017 (FY17) are for anchor tenants.

CMMT’s portfolio reversions have come under pressure (-3.5% in FY16), dragged down mainly by SWP and TCM which saw rental reversions of -43% and -7% respectively. We expect rental reversion for SWP in FY17-FY19 to improve from -20% year-on-year (y-o-y) to -5% y-o-y, and for TCM to turn around into positive territory from FY18. This is on the back of the completion of MRT1 construction works as well as the reconfiguration of its floors and reintroduction of more entertainment and food and beverage outlets in both malls.

Occupancy rates of CMMT’s assets have shown improvements, with the exception of East Coast Mall and TCO, as management continues to focus on maintaining occupancies to ensure its malls remain competitive. However, this comes at the expense of rental reversions as seen in the case of SWP. We understand that TCO should see full occupancy in 2Q17 as the leases have been renewed. Barring SWP and TCM, CMMT’s assets have managed to maintain occupancy rates of above 95%.

While FY17 will see a higher percentage of net lettable area (NLA) expiring (49.1% versus 33% in FY16), we think that earnings will continue to be supported by positive rental reversions for all its assets except SWP and TCM. Note that both SWP and TCM only account for one third of the expiring leases in FY17. We expect lease expirations of around 28% and 22% of the group’s NLA in FY18 and FY19 respectively. We forecast overall rental reversions of low- to mid-single digits in FY17-FY19.

Following our meeting and to reflect the latest annual report, we fine-tune our FY17-FY19 earnings per share estimates by -2% to +1%. We cut our FY17-FY19 dividend per share estimates by 5%-8% as we lower our assumption for the percentage of management fees paid in units to around 50%. — CIMB Research, April 17