Better profit seen for CMMT’s Sungei Wang on higher rental, store openings

This article first appeared in The Edge Financial Daily, on July 25, 2019.
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CapitaLand Malaysia Mall Trust
(July 24, RM1.06)
Maintain hold with an unchanged target price (TP) of RM1.15:
Share prices of the sector have been supported by declining Malaysian Government Securities yields. For CapitaLand Malaysia Mall Trust (CMMT), every 10-basis-point reduction in risk-free rates increases our TP by two sen.

The dividend yield for CMMT is also high relative to the sector. However, we believe CMMT would likely lag its peers until we see an improved contribution from The Mines and Sungei Wang Plaza. We expect occupancy at The Mines to trend lower following Giant Hypermarket’s exit from the mall, while Sungei Wang Plaza could see higher marketing costs ahead of Jumpa’s opening in September 2019.

We are cautious on The Mines as we expect weakness in its occupancy rates and rental reversion trends. We believe there will be downtime for the mall’s supermarket area of about 57,000 sq ft or 7.8% of Net Lettable Area, as the previous anchor tenant Giant has moved out of the mall.

Potential catalysts include a stronger-than-expected rental reversion and improved occupancies would lift CMMT’s earnings. Sungei Wang Plaza’s occupancy is currently below 80%, while rental rates have a potential upside due to the completion of asset enhancement initiatives. Progressive store openings should lead to stronger earnings from Sungei Wang Plaza next year.

Our TP of RM1.15 is derived from the dividend discount model factoring in a 7.9% cost of equity and a 0.8% terminal growth. The soft market outlook for retail spending may impact CMMT as it is largely retail-focused. Tenants’ capacity to absorb rental increases may be affected by their lower sales — this would negatively impact CMMT. It also derives 3% to 4% of its top line from turnover rent. — AllianceDBS Research, July 24