REIT CAPITAMALLS TRUST (CMMT MK, CAMA.KL) 12 April 2013

Queensbay Mall, the next leg of re-rating Company report BUY

Tan Ee Zhio (Upgraded ) [email protected] +603 2036 2304 Rationale for report: Company Update

Investment Highlights Price RM1.93 Fair Value RM2.15 52-week High/Low RM1.78/RM1.43 • We are upgrading Capitamalls Malaysia Trust (CMMT) to a BUY, with a higher fair value of RM2.15/unit vs. RM2.00/unit Key Changes previously, based on a DCF valuation. This follows the potential Fair value  injection of , which is set to enhance CMMT’s EPS  future earnings outlook.

YE to Dec FY12 FY13F FY14F FY15F • We believe this is the start of an extended upward re-rating Revenue (RMmil) 289.2 304.1 381.2 398.9 cycle, driven by Queensbay Mall’s position as a ready and yield- Net profit (RMmil) 250.5 156.9 184.6 194.3 accretive asset. Our BUY conviction rests on the following:- Realised Net profit (RMmil) 149.3 156.9 184.6 194.3 EPU (Sen) 8.4 8.9 10.4 11.0 (1) CMMT’s first-mover acquisition advantage, among the retail EPU Growth (%) 25.8 5.1 17.7 5.3 REITs, given stabilisation of rental yields at Queensbay Mall. Consensus EPS (Sen) - 8.5 8.9 10.5 DPU (Sen) 8.4 8.9 10.4 11.0 PE (x) 22.9 21.7 18.5 17.6 (2) Given the active tenant remixing and asset enhancement EV/EBITDA (x) 14.3 21.2 18.6 18.0 initiatives, the Mall has achieved an over 20% rental reversion Div yield (%) 4.4 4.6 5.4 5.7 since CMA’s acquisition. Current rentals stand at c.RM6psf vs. ROE (%) 11.8 7.4 7.3 7.7 RM5psf previously, with occupancy standing at c.95%. Gearing (%) 27.9 28.2 33.1 33.1 (3) No cannibalisation between Queensbay Mall and Gurney Stock and Financial D ata Plaza, despite being in . Both are located at different

Shares Outstanding (million) 1,768.0 affluent locations in and Georgetown, respectively. Market Cap (RMmil) 3,147.1 Book value (RM/share) 1.20 (4) The pre-emptive mandate to issue more shares of up to P/BV (x) 1.5 353.6mil hints of the potential acquisition of Queensbay Mall. ROE (%) 11.8 Net Gearing 27.9 (5) Gearing is manageable at 28% as at end-FY12, suggesting

room for additional debt. Thus, CMMT is likely to acquire Major Shareholders CapitaMalls Asia Ltd (35.3%) EPF (9.5%) Queensbay Mall via a mix of debt and equity funding.

Free Float (%) 41.5 • Putting things into perspective, based on our 5.5% implied cap Avg Daily Value (RMmil) n/a rate, the acquisition price and capital value of Queensbay Mall are estimated to be at RM818mil and RM594psf, respectively. Price performance 3mth 6mth 12mth

• We are maintaining our FY13F estimates, but have revised our Absolute (%) 1.1 9.7 39.1 Relative (%) (0.4) 6.4 30.1 FY14F and FY15F earnings to RM184mil (+18%) and RM194mil (+5%), respectively. Potential acquisition of Queensbay Mall is expected to complete next year and contribute meaningfully to 2.00 1,781 the bottom line from FY14F onwards. The average rental is projected at RM6.18psf with an occupancy rate of 95%.

1.50 1,545 • Our model assumes a 50:50 ratio of debt and equity funding. nI d e Gearing continues to be manageable at 33%, below CMMT’s ) x M P R 1.00 1,309 o internal gearing threshold of 40%. The acquisition which is likely ( ni st to be funded partly by debt will be accretive to overall DPU, given CMMT’s lower average cost of debt of 4.7% than our 0.50 1,073 implied cap rate of 5.5%.

• Post injection, accretion to DPU is visible, rising to 10.4sen and 0.00 838 J aJ uJ aJ J aJ 11.0sen for FY14F and FY15F, respectively, from its pre-injection u n l n u n 1-l - 1- - 1-l - 0 1 1 21 2 31 DPU of 9.4en and 10.0sen. Capitamalls FBM KLCI • CMMT now trades at higher distribution yields for FY14F and FY15F, respectively, at 5.4% and 5.7% vs. 4.9% and 5.3% for PREIT. In addition, we are of the view PREIT’s distribution yields PP 12247/06/2013 (032380) have normalised at current levels, given that the significantly stronger earnings have been priced-in by the market. Capitamalls Malaysia Trust 12 April 2013

UPGRADING TO A BUY; FV: RM2.15/UNIT  PREIT’s and IGBR’s potential acquisitions are not ripe for injection We are upgrading Capitamalls Malaysia Trust (CMMT) to a BUY, with a higher fair value of RM2.15/unit vs. Pavilion REIT’s (PREIT Mk Equity, HOLD) sizeable RM2.00/unit previously, based on a DCF valuation. pipeline of assets are not ready for injection now. The earliest injection is seen in FY14F for after This follows the potential injection of Queensbay Mall, undergoing a repositioning of tenant mix in 3QFY13. which is set to enhance CMMT’s future earnings starting Management will evaluate the mall in 4QFY13 to assess if from FY14F onwards. it is yield accretive for acquisition.

The tentatively timeline for injection for da:men mall in USJ and Pavilion Extension are in FY15F and FY16F,  First-mover acquisition advantage; Queensbay Mall respectively. poised to be acquired IGB REIT (IGBR Mk Equity, HOLD), on the other hand, CMMT would have the first-mover acquisition advantage lacks a visible acquisition pipeline in the near- to medium- among the retail REITs under our coverage, given the term. The injection of Southkey Mall in is only stabilisation of rental yields at Queensbay Mall. envisaged to occur at the earliest in FY18F, upon completion (5 years) and stabilisation of rental yields (3 years).

 Turning positive on CMMT; Hence, our upgrade IGBR is poised to grow organically via asset enhancement initiatives of the and Gardens Mall. CMMT now trades at higher distribution yields for FY14F and FY15F, respectively, at 5.4% and 5.7% vs. 4.9% and 5.3% for PREIT.  No cannibalisation between Queensbay Mall and More importantly, we are of the view PREIT’s distribution despite both being in Penang yields have normalised at current levels, given that significantly higher earnings have been priced-in by the Queensbay Mall complements well with Gurney Plaza, market. given no cannibalisation. Both are located at different affluent locations in Bayan Lepas and Georgetown, Hence, CMMT is now our top REIT pick. PREIT and IGBR respectively. remain as HOLDs, with respective fair values of RM1.65/unit and RM1.45/unit. YTD, these three stocks Our checks suggest that Gurney Plaza and Queensbay have outperformed the FBM KLCI, on average by 9%. Mall are said to be the two best malls in Penang. This is a positive as it further drives CMMT’s earnings and strengthens foothold in Penang.

AN EXTENDED UPWARD RE-RATING CYCLE

 Hints of potential Queensbay Mall acquisition in We believe this is a start of an extended upward re-rating the making cycle, driven by Queensbay Mall’s position as a ready and yield-accretive asset. CMMT appears to be paving the way for acquisitions to expand its portfolio, with a pre-emptive mandate to issue

more shares of up to 353.6mil, representing 20% of its existing fund size. This would in turn enlarge its fund size  CMMT is the only big retail REIT with a ready asset to 2.12bil from 1.77bil, should the group decides to issue for injection now the entire 353.6mil. Capitamalls Asia (CMA) acquired Queensbay Mall (NLA: The issuance of new units can be used anytime, in the 892,361sf) in April 2011 for RM652mil comprising 90.7% of preceding 12 months, for the purpose of acquisition, retail floor area and 100% of car park bays. The initial working capital expenditure, or refinancing existing debt. property yield was at c.5% at average rental of c.RM5psf. Occupancy stood at 92%. Based on the CMMT’s closing price of RM1.93/unit, the group can raise about RM682mil. Given the active tenant remixing and asset enhancement initiatives, Queensbay Mall has achieved an over 20% Furthermore, CMMT had in December 2012 issued a 4- rental reversion, since CMA’s acquisition. Current rentals year unrated and secured Medium Term Notes of stand at c.RM6psf, with occupancy standing at c.95%. RM300mil.

This, in our view, hints of a potential acquisition of Queensbay Mall. We reckon CMMT will acquire via a mix of debt and equity funding.

AmResearch Sdn Bhd 2 Capitamalls Malaysia Trust 12 April 2013

Equity funding will accelerate CMMT’s market  Acquisition by of equity and debt funding; 50:50 capitalisation expansion and thereby, creating liquidity. ratio Meanwhile, acquisition by debt will be accretive to its DPU underpinned by lower cost of debt compared to the Gearing is manageable at 28%, as at end-FY12, well property yields. below the 50% threshold, suggesting room for additional debt for acquisition.

Average cost of debt currently stands at 4.7%. Moreover,  Solid pipeline ahead 42% of the CMMT’s total assets currently ( and East Coast Mall) are unencumbered. Further out, CMA is developing a 635,000sf mall in Taman Melawati, with Sime Darby (50:50 joint venture). This Our model assumes a 50:50 ratio of debt and equity development is expected to be completed in FY16 at an funding based on an estimated acquisition price of estimated development cost of RM500mil. This marks RM818mil. Gearing continues to remain manageable at CMA’s first greenfield development in Malaysia and will 33%, below CMMT’s internal gearing threshold of 40%. further strengthen foothold in the country. Flipside, CMMT has room to gear up to 80% before hitting its internal gearing benchmark of 40%. Based on our back- on-the-envelope calculation, CMMT has ample room to  Continues hunting for yield accretive acquisitions borrow up to RM655mil.

In addition, CMMT is on a constant look-out for yield accretive acquisitions in Malaysia. Potential acquisitions will continue to be centred on day-to-day necessity TABLE 1 : GEARING LEVEL shopping malls. This is in-line with its current portfolio mix to be a “pure-play” REIT. Funding proportion - Debt (%) 50 60 70 80 - Equity (%) 50 40 30 20

FINANCIALS Gearing (%) 32.5 34.5 36.6 38.7  FY14F earnings to be lifted by potential injection of Source: Company / AmResearch Queensbay Mall

We are maintaining our FY13F estimates, but have revised our FY14F and FY15F earnings to RM184mil (+18%) and Note that CMMT has just issued a 4-year unrated and RM194mil (+5%), respectively. secured Medium Term Notes of RM300mil. In addition, CMMT has obtained approval for the establishment of a 2- Potential acquisition of Queensbay Mall is expected to year Medium Term Note programme of up to RM3bil in complete next year and contribute to bottom line from nominal value. FY14F. The average rental is projected at RM6.18psf, with a 95% occupancy rate.

 More accretion in DPU arising from acquisition

 Implied cap rate of 5.5%, estimated acquisition As demonstrated below, the potential injection in FY14F is price of RM818mil accretive to overall DPU. More importantly, the acquisition partly funded by debt is accretive to DPU. This is CMA had acquired Queensbay Mall for RM652mil, which is supported by CMMT’s average cost of debt of 4.7% which equivalent to RM730psf of NLA. At an initial net property is lower our implied cap rate of 5.5%. yield of c.5%, this translates into an initial average net rental of RM2.72psf. Post injection, accretion to DPU is visible, rising to 10.4sen and 11.0sen in FY14F and FY15F, respectively, from its Net operating income on an annualised basis amounted to pre-injection DPU of 9.4sen and 10.0sen. RM38mil FY11.

Putting things into perspective, based on our 5.5% of implied cap rate, the acquisition price and capital value are estimated to be at RM818mil and RM594psf, respectively.

Looking at the estimated enterprise value/psf for FY14F, PREIT (RM3,218) is the most expensive, underpinned by its premium status and location. This is followed by IGBR (RM2,264psf) and CMMT (RM1,349psf).

AmResearch Sdn Bhd 3 Capitamalls Malaysia Trust 12 April 2013

TABLE 2 : GREATER SCOPE OF ACC RETION TOWARDS DPU

FY13F FY14F FY15F

Incorporating Queensbay Mall DPU (sen) 8.9 10.4 11.0 Distribution yield (%) 4.6 5.4 5.7

Excluding Queensbay Mall

DPU (sen) 8.9 9.4 10.0 Distribution yield (%) 4.6 4.9 5.2

Source: Company / AmResearch

 CMMT trading at higher distribution yield than PREIT in FY14F

As such, CMMT now trades at higher distribution yields for FY14F and FY15F, respectively, at 5.4% and 5.7% vs. 4.9% and 5.3% for PREIT.

In addition, we are of the view that PREIT’s distribution yields have normalised at current levels, given that stronger earnings have been priced-in by the market.

Our DPS assumption is based on a 100% distribution payout ratio.

TABLE 3 : SECTOR VALUATION MATRIX

DPU (sen) Dividend Yield (%) EPU (sen) EPS Growth (%) Market Cap Share Fair Value Company FY13F FY14F FY15F FY13F FY14F FY15F FY13F FY14F FY15F FY13F FY14F FY15F (RM mil) price (RM) (RM) Rating

CAPITAMALLS MALAYSIA TRUST 8.9 10.4 11.0 4.6 5.4 5.7 8.9 10.4 11.0 10.9 17.2 5.8 3,412.3 1.93 2.15 BUY PAVILION REIT 7.1 7.8 8.3 4.5 4.9 5.3 7.1 7.8 8.3 9.7 9.7 6.4 4,752.4 1.58 1.65 HOLD IGB REIT 5.9 6.2 6.5 4.2 4.5 4.6 5.9 6.2 6.5 6.5 6.3 4.3 4,768.1 1.40 1.38 HOLD AL-AQAR HEALTHCARE REIT 8.4 8.9 9.4 6.4 6.8 7.1 9.0 9.0 9.6 4.4 0.6 6.5 912.1 1.31 1.45 HOLD

Source: AmResearch Share prices as at 11 April 2013

AmResearch Sdn Bhd 4 Capitamalls Malaysia Trust 12 April 2013

CHART 1 : PB BAND CHART CHART 2 : PE BAND CHART

2.0 15.4 14.6 13.8 1.6 13.0 12.2 11.4 10.6 1.2 9.8 ) )9.0 x (x ( 8.2 7.4 0.8 6.6 5.8 5.0 4.2 0.4 3.4 2.6 1.8 0.0 1.0 A J O J A J O J A J O J A J O J A J O J D M J O J A J O J A p u c a p u c a p u c a p u a p u c a e a u c a p u c a p r l t n r l t n r l t n r l tc n r l t n c r -l t n r -l -t n r - 0- 0- - - 0- 0- - - 1- 1- - 1- 1- 1- - - 1- 1- - 1- 1- 1 1- 1- 1- 1 1 1- 1- 80 8 8 90 90 9 9 01 01 0 0 1 1 1 1 21 21 2 2 31 0 1 1 2 2 2 2 3 3

AmResearch Sdn Bhd 5 Capitamalls Malaysia Trust 12 April 2013

TABLE 4 : FINANCIAL DATA

Income Statement (RMmil, YE 31 Dec ) 2011 2012 2013F 2014F 2015F

Gross rental income 230.9 289.2 304.1 381.2 398.9 Revenue from tenancy 194.0 233.4 304.1 381.2 398.9 Other revenue 36.9 55.8 0.0 0.0 0.0 Property mgmt fees (68.5) (93.2) (91.2) (114.4) (119.7) Other operating expenses 0.0 0.0 0.0 0.0 0.0 Net property income 162.4 196.0 212.8 266.9 279.2 Interest income 3.1 4.0 4.7 2.0 1.8 Other income 2.3 0.1 2.3 0.0 0.0 Fair value adj 68.9 113.4 0.0 0.0 0.0 Non property expenses (18.2) (20.7) (22.1) (24.3) (26.7) Borrowing cost (38.7) (42.3) (40.8) (60.0) (60.0) Net income before tax 179.8 250.5 156.9 184.6 194.3 Taxation 0.0 0.0 0.0 0.0 0.0 Net income after tax 179.8 250.5 156.9 184.6 194.3 Distributable income* 118.3 149.3 156.9 184.6 194.3 *Net income after tax less fair adj

Balance Sheet (RMmil, YE 31 Dec) 2011 2012 2013F 2014F 2015F

Cash 115.4 159.0 136.2 116.9 97.7 Trade & other debtors 9.2 24.4 25.4 26.4 27.5 Others 0.0 0.0 0.0 5.1 45.1 Current Assets 124.6 183.4 161.6 148.4 170.3 Trade & other Creditors 83.4 57.3 59.0 60.8 62.6 Provision for income dist 0.0 0.0 0.0 0.0 0.0 Short term Borrowings 9.0 54.0 54.0 54.0 54.0 Others 0.0 27.4 34.9 0.0 0.0 Current Liabilities 92.4 138.7 147.9 114.8 116.6 Net Current Assets/Liab. 32.2 44.7 13.7 33.7 53.7 Fixed assets 2,781.0 2,936.0 2,916.0 3,714.2 3,694.2 Other Long term assets 1.1 2.4 2.4 2.4 2.4 Long-term Assets 0.0 0.0 0.0 0.0 0.0 Total Assets 2,906.7 3,121.8 3,080.0 3,865.0 3,866.9 Term loans 815.2 815.5 815.5 1,224.6 1,224.6 Other Long term Liabilities 47.2 51.0 0.0 0.0 0.0 Long-term Liabilities 862.4 866.5 815.5 1,224.6 1,224.6 Share Capital 1,806.7 1,815.2 1,815.2 2,224.3 2,224.3 Reserves 0.0 0.0 0.0 0.0 0.0 Undistributed income 145.1 301.4 301.4 301.4 301.4 Shareholders’ Funds 1,951.8 2,116.6 2,116.6 2,525.7 2,525.7 Total Liab & SF 2,906.7 3,121.8 3,080.0 3,865.1 3,866.9

Cash Flow Statement (RMmil, YE 31 2011 2012 2013F 2014F 2015F Dec)

Pretax profit 179.8 250.5 156.9 184.6 194.3 Working Capital 22.6 (18.4) 0.7 0.8 0.8 Others (27.1) (66.1) 36.1 57.9 58.2 Operating cash flows 175.3 166.0 193.7 243.3 253.3 Capex (27.8) (27.1) (20.0) (20.0) (20.0) Enchancement exp. (533.2) (2.2) 0.0 (818.2) 0.0 Others 3.1 4.0 4.7 2.0 1.8 Investing cash flows (557.9) (25.4) (15.3) (836.2) (18.2) Issue of shares 483.6 0.0 0.0 409.1 0.0 Dividend paid (144.1) (94.2) (156.9) (184.6) (194.3) Borrowings 78.8 44.3 0.0 409.1 0.0 Others (47.7) (50.6) (40.8) (60.0) (60.0) Financing cash flow 370.6 (100.6) (197.7) 573.6 (254.3) Net inflows/(outflows) (12.0) 40.0 (19.3) (19.2) (19.2)

Source: Company, AmResearch estimates

AmResearch Sdn Bhd 6 Capitamalls Malaysia Trust 12 April 2013

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