CapitaMalls Malaysia Trust
(July 22, RM1.69)
Maintain buy call but with a lower target price of RM2.05: Net profit ex-revaluation gains (RM78 million) of RM36 million for the second quarter of 2013 (2Q13) was 6% higher year-on-year (y-o-y) (+2% quarter-on-quarter [q-o-q]), driven by higher revenue (+4% y-o-y; flat q-o-q) and lower interest costs (-5% y-o-y; -15% q-o-q).

Top line growth was mainly underpinned by higher revenue from Gurney Plaza and The Mines, while interest costs were lower from lower average cost of debt of 4.3%. This was brought on by active credit management (tightened floating rate credit rate by 30 basis points).

Net property income (NPI) margin fell 0.6 percentage point y-o-y (-1.6ppt q-o-q) primarily due to lower NPI margin at Sungei Wang Plaza (-1.8ppts y-o-y; -1.9ppts q-o-q). This was attributed to flat rental growth as a result of traffic issues arising from the closure of a car park entrance due to the ongoing mass rapid transit (MRT) works.

However, NPI margins improved at The Mines and East Coast Mall on the back of resilient rental reversions (+10% and +20% respectively).

Sungei Wang Plaza is expected to see flat rental growth, while occupancy is to remain muted due to the lower traffic from MRT works. East Coast Mall is also expected to undergo gradual refurbishment, which could result in some rental vacuum staggered over two years but this would result in 20,000 sq ft of new retail space.

We understand the refurbishment on the East Coast Mall would require RM60 million in capital expenditure over 2013 and 2014 and provide return on investment in the high single digit.

After adjusting for higher capital expenditure, incorporating lower earnings and rolling over our valuation base to FY14F, our price target is lowered to RM2.05. — Hwang DBS Vickers Research, July 22

This article first appeared in The Edge Financial Daily, on July 23, 2013.