CGSCIMB is keeping their Hold rating on CapitaLand Malaysia Trust (CLMT) while lowering their dividend discount model based trading price from 54 sen to 51 sen.
“Although the trust had acquired Queensbay Mall in Penang in quarter one 2023 to boost its distribution per unit, we see risks that its existing property portfolio (particularly 3 Damansara and Sungei Wang Plaza) would continue to struggle in raising its occupancy rate and generating rental income that could make up for the increase in upkeep expenses,” said CGSCIMB in the recent company note.
CGSCIMB believes CLMT needs to do more to gain prominence in the Klang Valley’s uber-competitive retail and office markets. They are of the view that CLMT’s recent acquisition of its second industrial property, located in Shah Alam, Selangor, would not move the needle much since it made up only 1% of CLMT’s total property investments as at end-Mar 2023.
“Although we are not ruling out CLMT still having the appetite to add more properties to its portfolio, its high gearing of 44% of total asset size as at 31 Mar 2023 could be an obstacle for the trust to buy high-yielding properties, in our view, while any plan to do more cash calls would dilute unitholders’ distribution per unit,” said CGSCIMB.
In CGSCIMB’s view, an upside risk for the trust is filling up the rental spaces at its 3 Damansara office and mall (quarter one 2023 occupancy rate: 67.7%) and Sungei Wang Plaza (73.9%) although they fear that could be a tall order as the two properties are located in matured areas in the Klang Valley that are crowded with bigger-name competitors.
Another major upside risk for CLMT is strong rental reversions to bring its rental income back to pre-Movement Control Order levels of 2019. The trust’s annualised quarter one 2023 rental revenue (inclusive of some contribution from the newly acquired Queensbay Mall) amounted to RM246.8 million, 7.5% shy of financial year 2019’s RM266.9 million.
“Steep competition may impede CLMT from commanding strong lease increments throughout our forecast horizon, in our view,” said CGSCIMB.
Downside risks come from occupancy rates dipping further and negative rental reversions. CLMT’s commendable 13.1% year-on-year quarter one 2023 revenue growth was offset by utilities and finance costs, which expanded at even higher rates.
CGSCIMB revised their financial year 2023-2024 future forecasts, cutting financial year 2023-2024 future distribution per unit by 12-20%, on the back of a 1 million increase in its units base after the completion of its share placement, and higher property upkeep expenses.
“We also introduce our financial year 2025 future numbers. We raise the risk-free rate in our dividend discount model assumption from 3% to 4%, resulting in our trading price declining to 51 sen,” said CGSCIMB.
