In anticipation of a rate cut over at Bank Negara, we screen out REITs with the conviction that we would see some stable yields and capital gain during periods of lower rates. Definitely a good addition into our portfolio during these times.
CMMT comes as the highlight on what we are searching for.
Potential Rise in Income
Currently, the lowest income contributor to for CMMT would be Sungei Wang due to the enhancement work that is currently underway. Jumpa (joom-pa? jum-pa? no idea) as what they call it, would be reintroduced as a new, fully revamped Sungei Wang on the Bukit Bintang strip.
The income would rise once the property starts operating and it is estimated by management to open Q3 2019.
Our estimate places the new Sungei Wang property to yield RM 16 million (from RM 6M current) when it stabilizes with at least 90% occupancy. That would see a 160% gain from what the property is generating at the moment. The loss-making property should go back to profit by Q4 2019.
Besides Sungei Wang, The Mines is undergoing the same renovation but not similar to Jumpa to improve on the attractiveness of the property. Again, we expect improvement in income but not as significant as 160% gain in the case of Sungei Wang.
Management has yet to guide the actual completion, but we believe that it is not quite a full revamp of the whole property and the likelihood of an “expected opening date” shouldn’t be on the agenda. We do not have an estimate figure for the enhancement in The Mines. The banking reports provide un-realistic numbers in this case.
The anchor for profit and dividend payout should still be the top mall for Penang and Kuantan. Gurney Plaza is the top mall in Penang competing with another CapitalMalls Asia owned Queensbay Mall. The yield is strong from this property and CMMT continues to milk a lot from it. We don’t see this trend breaking long as tourism is key for Penang.
East Coast Mall anchors 20% of total income due to how high the margin were created. We believe that East Coast Mall stands out more that the older Megamall just round the corner. Again, malls who play on increasing attractiveness tends to get better rental yield where it could attract a bigger number of retail shops or high end.
With these two properties still providing stable returns, it could be thought as a safety net in locking in these level of income for the next 3 years. Any addition from enhancement works would be additional to the group as a whole.
This quarter sees CMMT reporting losses for the quarter. The sum of RM 30 million in losses came from a write off coming from Sungei Wang. The original works and layout were written off in this quarter.
We believe that the market sold off the shares of CMMT in anticipation of a lower income and price to earnings this quarter. But when the income normalizes once the Sungei Wang property gets going, we should be looking at revaluation in the level the share would be trading.
Our View & Strategy
Buy half of what is intended at current levels and keep the other half below RM1.00. As what we observed, the weakening of KLCI over these few weeks might see selling pressure and if a RM 0.9XX price is possible, it is definitely a buy.
But be aware that by Q3 onwards, the share price might begin creeping up expecting rental yields to rise from Sungei Wang. We believe that the price moment should come in September where more tenants commit to the opening of the new property.
We project a RM1.20 price excluding dividends from this trade making a 14% gain. Although the potential gains isn’t that big, we believe that the concentration of funds to be allocated in this counter could be higher as the volatility isn’t going to give you heart attacks.