Capitaland’s earnings revised lower as retail remains challenging

The earnings is expected to be further dragged down by negative rental reversion

by NUR HAZIQAH A MALEK / Pic credit:

CAPITALAND Malaysia Mall Trust’s earnings outlook grows dimmer due to prolonged movement restrictions and lower rental rates for new tenants.

MIDF Amanah Investment Bank Bhd (MIDF Research) has revised its financial year 2021/2022 forecast (FY21/22F) earnings forecast by -21.8% and -5.5%, respectively, as the investment bank expects earnings in the third quarter ending Sept 30, 2021 (3Q21), to remain weak due to full lockdown.

Besides, the research house also expects earnings to be dragged down by negative rental reversion, which means new leases are lower than previous tenants on average.

MIDF Research analyst Jessica Low Jze Teing said Capitaland’s first half of 2021 (1H21) core net earnings of RM19.2 million were below expectations, hitting 28% of its and consensus full-year estimates.

“The negative deviation is due to the weaker-than-expected earnings in 2Q21 as a result of the imposition of full lockdown in Malaysia,” she wrote in a research note last Friday.

Nevertheless, MIDF Research has maintained its ‘Neutral’ rating on Capitaland on the back of muted earnings outlook for the group due to a challenging retail backdrop and negative rental reversion outlook.

The investment bank revised its target price (TP) to 58 sen from the previous 60 sen, corresponding to the downward revision in earnings and distribution per unit (DPU).

Low said the research house’s valuation is based on the dividend discount model (DDM). CGS-CIMB Securities Sdn Bhd analyst Sharizan Rosely concurred, saying Capitaland is “still not out of the woods”.

He said Capitaland’s 1H21 results only made up of 33% to 38% of the brokerage firm’s and consensus full-year estimates, with key deviations being weak rental income and lower net property income (NPI) margin of 49%, flattish year-on-year (YoY) but below its FY21F of 52%.

“We came away from the post-2Q21 results conference call still feeling cautious on Capitaland’s recovery outlook, taking into account the likely weaker quarter-on-quarter revenue and earnings in 3Q21 due to the imposition of the Enhanced Movement Control Order (EMCO) for most of July (Selangor and Kuala Lumpur) and the potential reopening of nationwide retail malls only in Phase 4 of the National Recovery Plan, likely by year-end,” he wrote in a research note last Friday.

Sharizan said the appeal from the retail industry for an earlier opening of retail malls is ongoing, suggesting a subdued period for Capitaland’s 2H21F rental income while rental assistance could intensify in 3Q21 and tenant sales and footfall could remain weak.

He said 1H21’s operating statistics still point to challenges in the medium term but should be supported by better performance for Capitaland’s retail mails in Penang and Pahang, as those states have moved to Phase 2.

The analyst noted that 1H21 portfolio rental reversion stood at -11.5%, while retail portfolio occupancy rates were 83% (1Q21: 84%).

“To reflect the impact of the extended MCO in 2H21, we cut FY21-23 earnings per share and DPU by 13%-23% on weaker rental income and lower NPI margin,” he said.

CGS-CIMB has retained its ‘Hold’ call, supported by the group’s plans to acquire new assets and diversify away from the retail space.

However, the brokerage firm cut its DDM-based TP to 62 sen given the reduced DPU forecasts, cost of equity of 5.2% (5.8% previously) and adjusted beta of 0.4 times (0.5 times previously)

Sharizan said among the upside risks are retail recovery and asset acquisition, while the downside risk is on weaker earnings.

Capitaland recorded a 5.7% YoY improvement in 2Q21 revenue to RM52.71 million, mainly attributable to lower rental relief for eligible tenants and higher contribution from other revenue sources.

Its 2Q21 net profit surged from RM192,000 to RM11.49 million.

Still, 1H21 earnings were below analysts’ expectations due to negative rental reversion and lower portfolio occupancy rates.

Capitaland shares rose 0.8% to 63 sen last Friday, valuing the company RM1.33 billion.