CapitaLand Malaysia Trust - Still Challenging

Date: 25/07/2022

Source  :  KENANGA
Stock  :  CLMT       Price Target  :  0.51      |      Price Call  :  HOLD
        Last Price  :  0.51      |      Upside/Downside  :  0.00 (0.00%)

2QFY22 net profit of RM23.1m (+101% YoY) brought 1HFY22 net profit to RM43.7m (+128% YoY), which is below our expectation, accounting for 45% of our full-year forecast. DPU of 1.00 sen (in 2QFY22) and 1.95 sen (in 1HFY22) is below our FY22 estimate of 4.7 sen. We have adjusted our FY22-FY23 earnings forecasts lower by 14%-18%. Maintain MARKET PERFORM with a revised TP of RM0.51 based on a target yield of 7.5% (which implies a 3.0% yield spread above our 10-year MGS assumption of 4.5%). There is no adjustment to our TP based on ESG for which it is given a 3-star rating as appraised by us.

Below expectations as 1HFY22 net profit of RM43.7m (+128% YoY) only accounted for 45% of our full-year estimate but is above consensus (at 55%). CLMT declared DPU of 1.00 sen in 2QFY22, taking 1HFY22 DPU to 1.95 sen (or 41% of our full-year estimate).

Results’ highlights. YoY, gross revenue rose 30% to RM68.3m while net profit was up 101% to RM23.1m in 2QFY22, lifted mainly by stronger gross rental income (+26%) as 2QFY21 was affected by Covid-19 disruptions.

QoQ, topline was broadly flat (+1%) with net profit increasing by 13% due to other non-operating income contribution. For 1HFY22, on the back of gross revenue of RM135.9m (+24% YoY), net profit jumped 128% YoY to RM43.7m on account of higher net property income margin (at 54.1% versus 46.9% previously). The main earnings contributors were Gurney Plaza (+46% YoY in net property income to RM45.4m) and East Coast Mall (+45% YoY in net property income to RM22.1m). Overall portfolio occupancy rate stood at 80.8% at end-June 2022 (vs 83.9% at end-June 2021 and 79.5% at end-March 2022) while rental reversion saw an average rate decline of 4.2%.

Outlook. With a recovery currently underway – as shopper traffic has soared 52% in 1HFY22 (although still below the 2019 average) and tenant sales psf is already above pre-pandemic level – CLMT hopes to ride on the positive momentum and plans to raise occupancy rates going forward. In terms of portfolio lease expiry profile, as a percentage of gross rental income; 26.4% and 34.9% are due for expiry this year and next year, respectively. Over the longer term, it will be pursuing a diversification strategy to achieve a target of 20% asset under management in non-retail assets by 2025 (starting with the maiden acquisition in June of a logistics warehouse (NLA of 335,000 sf) in Sungai Jawi, Penang for RM80m).

Forecasts lowered. Following the interim results, we have adjusted our net profit projections to RM83.9m (-14%) for FY22 and RM82.5m (-18%) for FY23 after imputing lower average rental rate and weaker operating margins. Correspondingly, our FY22-FY23 gross DPU forecasts are lowered to 3.9 sen (from 4.7 sen) and 3.8 sen (from 4.8 sen), respectively implying yields of 6.9%-6.7%.

Still MARKET PERFORM. Our TP is revised to RM0.51 (from RM0.56) based on a target yield of 7.5% (which is derived from a 3.0% yield spread above our 10-year MGS assumption of 4.5%). The 3.0% yield spread essentially reflects CLMT’s challenging prospects, given its less prime asset profile and persisting downward pressure on rental reversions amid a tough retail industry environment while it will take time for its strategy to diversify into non-retail assets to show any meaningful impact.

Risks to our call include: (i) bond yield contraction/expansion, (ii) higher/lower-than-expected rental reversions, and (iii) higher/lower-than-expected occupancy rates.

Source: Kenanga Research - 25 Jul 2022

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