CMMT seen improving Klang Valley malls’ operational efficiency

This article first appeared in The Edge Financial Daily, on October 29, 2019.
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CapitaLand Malaysia Mall Trust
(Oct 25, RM1.04)
Maintain hold with a lower target price (TP) of RM1.05:
CapitaLand Malaysia Mall Trust’s (CMMT) third quarter of financial year 2019 (3QFY19) core net income of RM28.4 million or down 10% year-on-year (y-o-y) is below our and consensus expectations. Its contributions from asset-enhancement initiatives for Jumpa at Sungei Wang Plaza had yet to kick in as it only opened on Sept 25, 2019. Nonetheless, it was only a soft opening and Jumpa is expected to be officially launched in December 2019.

A decline in its distributable income was mainly due to lower contributions from Klang Valley malls, but partly mitigated by steady earnings from Gurney Plaza  and East Coast Mall. Quarter-on-quarter (q-o-q), its net income declined 0.5%. The trust’s 3Q portfolio net property income (NPI) declined 4.9% y-o-y to RM49.2 million, mainly due to lower contributions from three Damansara properties, The Mines and Sungei Wang Plaza.

Gurney Plaza and East Coast Mall still performed well in 3Q — the former improved from a higher rental reversion of 1.6%, coupled with a steady occupancy of 99.1% versus 98.7% in 2Q. Despite a higher occupancy of 80.8% in 3Q versus 75% in 2Q, Sungei Wang Plaza recorded losses of RM600,000 from negative rental reversions of 14.4%, coupled with ongoing enhancement works on Jumpa. As it progressively opens Jumpa — for now, only the lower ground and ground floors are open — CMMT’s earnings will start to pick up. We are expecting more meaningful contributions from 1QFY20.

The Mines’ NPI of RM7.8 million or -15.5% y-o-y and +11.3% q-o-q was due to negative rental reversions of 16.2%. Its occupancy improved to 84% from 80.1% in 2Q. The East Coast Mall had negative rental reversions of 0.3% due to the amalgamation of two units for a tenant. Excluding this, its rental reversions would have been positive. Its 3Q occupancy was steady at 99.5%, and its NPI was at RM10.6 million (+3.1% y-o-y).

CMMT’s portfolio’s rental reversion was negative at 6%, mainly from The Mines (-16.2%), Sungei Wang Plaza (-14.4%) and East Coast Mall (-0.3%). There are 22.2% of overall leases by net lettable area (NLA) expiring in FY19. However, lease expiries from Sungei Wang Plaza are contained at 2% of the overall leases by NLA. We expect upcoming reversions to be flat with most expiries from Gurney Plaza (11%) and The Mines (4.2%).

Sungei Wang Plaza’s Jumpa’s soft opening on Sept 29 saw a 50% occupancy versus a committed lease of 90.5%. As such, this project will start contributing to the group in 4Q but a more meaningful contribution will be from 1QFY20 as the committed lease of 90.5% comes in. Selected committed tenants include camp 5, Love, Bonito, Miniature and Japanese Curry Noodle & Udon.

CMMT is looking at FY19 as a transition year with assets experiencing enhancements. It will also look into improving its Klang Valley malls’ operational efficiency through proactive leasing strategies and tenant-mix adjustments. This includes securing a supermarket tenant for The Mines after Giant’s exit in April 2019. This is expected to be done by end-FY19. The management is currently undergoing negotiations with potential tenants and expects to make an announcement in 3Q.

We cut our earnings forecasts by 9% to 11% for FY19 to FY21 to account for the lower contribution from Sungei Wang Plaza. We expect earnings to remain weak for the upcoming quarter before rebounding in 1QFY20 onwards. At 0.8 times price-to-net asset value, the stock is trading at discounted levels. In addition, lower risk-free rates would be positive for valuation — every 10 basis points reduction in risk-free rates increases our TP by two sen.

However, we remain cautious on The Mines’ weakness which may push earnings further down. CMMT’s return on equity of 4.4% trails the sector’s average of 8.3% due to the drag from The Mines and Sungei Wang Plaza. We maintained our “hold” call on CMMT. Our TP decreases to RM1.05 after our earnings cut. Our TP is based on a dividend discount model with a cost of equity of 7.9% and a terminal growth of 0.8%. — AllianceDBS Research, Oct 25