3 Reasons Why CMMT Trade at Cheap Valuation

On behalf of Stocks Insights Team, I’d like to wish everyone a very happy Chinese New Year in advance! Let’s kick of this New Year with a brand new article about a Malaysian real estate investment trust, Capitaland Malaysia Mall Trust (“CMMT”).

Like any other real estate investment trusts, CMMT is listed in the Main Board of Bursa Malaysia with the stock code, KLSE: 5180. The company mainly focus on retail spaces in Malaysia and in recent years have not been doing well.

CMMT Historical Share Price

Share price have come under pressure from its peak of RM1.95 per share in year 2013 to just RM1.00 per share at the time of writing. This gives an attractive distribution yield of 6.19%. However, we should always examine further whether such dividend yield is sustainable or not.

So, here’s 3 reasons why CMMT is trading at cheap valuation:

#1: Negative Rental Reversion

CMMT Chart 1

CMMT Chart 2

As at 4Q 2019, CMMT has an average negative rental reversion of -5.7%. Out of the 5 properties owned by CMMT, only 2 properties have positive rental reversion. This means lower rental income moving forward for CMMT.

CMMT Chart 3

I believe that such negative reversion was to maintain the occupancy rate for both CMMT’s retail and office spaces. As at 4Q 2019, CMMT has an average occupancy rate of 93.8% which is healthy but at the expense of lower rental income.

#2: Major Asset Enhancement Initiative on Sungei Wang

In 2Q 2018, the management announced a major asset enhancement initiative (“AEI”) for its Sungei Wang (“SW”) Plaza following the exit of Parkson from SW Plaza. The AEI costs a total of RM54.5 mil for reconfiguring part of SW Plaza’s annex space.

The annex space was known as “Jumpa” with the interior designed to attract urbanites and tourists alike. It was opened on 25 September 2019. I was curious about how the crowd is like at there, so I went to check it out on a Friday night. Below are the photos I have taken on 3 January 2020:

Jumpa 1Jumpa 2 Jumpa 3 Jumpa 4 Jumpa 5

The annex has 6 levels in total. Except for level 1 and 2, all other levels are occupied. However, there is not much crowd during my visit. I’m surprised to be able to take a clear shot without any people walk pass-by. This is worrying because it’s Friday night and there is not much shopper traffic here.

Nevertheless, something caught my attention is the directory board here:

Jumpa 6

It seems there is a cinema at Jumpa. If this is true, then I believe it is good news for investors because cinema is one of the best anchor tenant for retail REITs, in my opinion. Good cinemas such as TGV, GSC or MBO can be a crowd puller for Jumpa. Thus, increases the shopper traffic.

#3: Lower Distribution per Unit Declared

CMMT Chart 4

Despite CMMT is trading at an attractive distribution yield, the company actually is paying lower distribution per unit since 2016. The main reason being the deteriorating financial results due to the above reasons.

My Insights

There is always a reason why a stock is trading at cheap valuation. You can never have both positive company’s outlook and cheap valuation. Both outlook and valuation will always goes in an opposite direction.

Find out the reason why CMMT is trading at cheap valuation and ask yourself, “is the issue facing CMMT temporary or permanent?” Then you’ll know whether to invest or not.

For CMMT, I would adopt the “wait and see” approach as things are not looking good for them.

If you would like to receive more article on REITs, do subscribe to this website. You can also check out some of my past articles on companies’ analysis or increase your investing knowledge by browsing through my articles on Investing 101.

Thomas Chua
An equity investor and co-founder of Stocks Insights. Prior to this, he was attached with medium-size audit firm for 2 years working as an external auditor where he have performed statutory audit on companies from various industries including oil & gas, retailers, manufacturing, industrial products & machinery, etc. He is also involved in Enterprise Risk Management exercise and the internal control framework review for entities undergoing a listing exercise on Bursa Malaysia and SGX Catalyst Board.

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