CapitaMalls Malaysia Trust
(Oct 23, RM1.42)
Maintain outperform with target price of RM1.57: CMMT’s realised net income (RNI) for the nine months ended September (9MFY14) of RM110.6 million came within expectations, making up 71% of consensus and 72% of our full-year estimate.

Year-on-year, 9M gross retail income (GRI) grew by 4% to RM235.1 million on the back of positive rental reversions from The Mines, East Coast Mall due to the full-quarter contribution from completion of Phase 1 of asset enhancement initiative (AEI) works, and Gurney Plaza.

However, operating cost increased by 11% due to cost pressures from electricity tariff hikes and renewable energy surcharge, higher electricity consumption, higher reimbursable staff costs, and property assessment fees, which impacted gross profit and East Coast Mall, resulting in flat net property income (NPI) growth.

However, RNI increased marginally by 1% due to lower financing cost (-1%) and higher interest income (8%).

Quarter-on-quarter, the top line was flat. However, operating cost increased by 1% due to other operating expenses, which dragged down NPI by 1% to RM50.6 million. That coupled with higher financing cost due to additional revolving credit facilities draw- down dragged RNI down by 3% to RM35.7 million.

We expect capital expenditure (capex) allocation of RM60 million for FY14 ending December, which will be mainly for Phase 2 of East Coast Mall AEI and Gurney Plaza reconfiguration. So far, CMMT has incurred RM42.4 million capex for 9MFY14.

Low Peck Chen (the former chief financial officer) was appointed the new chief executive officer on Oct 8 replacing Sharon Lim. Low will be replaced by Yue Pei San.

Sungei Wang may not see positive rental reversions pending the completion of construction on the Klang Valley Mass Rapid Transit System 1 by 2017.

We maintain “outperform” on CMMT as we believe the stock remains an unwarranted laggard as it is able to offer 6.5% gross dividend yields against other MREITs’ 5.2% to 6.1%. We expect any European quantitative easing to be a positive rerating catalyst for MREITs while most of the near-term earnings risks have been accounted for.

We maintain our target price at RM1.57 based on our target FY15E gross dividend yield of 5.9% (net: 5.3%) which is a +2.1% spread to calendar year 2014E 10-year Malaysian Government Securities of 3.8%. — Kenanga Research, Oct 23

This article first appeared in The Edge Financial Daily, on October 24, 2014.