1H18 results missed our and consensus estimates. Apart from Sungei Wang Plaza, other assets showed weaker performance (ie lower rental reversion and occupancy rate), which prompted us to downgrade the stock from HOLD to SELL with a lower target price of RM1.00 (previously RM1.15). We do not foresee earnings recovery in the near term given sluggish asset quality coupled with uninspiring sector-wide concern on oversupply of retail mall and office building.

RESULTS

• Below expectations. CapitaLand Malaysia Mall Trust (CMMT) reported a 2Q18 revenue of RM87.4m (-2.7% qoq, -4.9% yoy) and core net profit of RM33.4m (-10.2% qoq, -16.2% yoy). This brings its 1H18 revenue to RM177.1m (-3.9% yoy) and core net profit to RM70.7m (- 11.8% yoy). 1H18 core net profit accounts for 45.1% and 44.5% of our and consensus’ fullyear estimates respectively.
• Declares 4.02 sen dividend. CMMT has declared a 4.02 sen dividend during 2Q18 which represents an annualised yield of 6.5%. The dividend declared also represents a payout ratio of >100% which we do not think is sustainable moving forward as earnings will continue to be at risk

STOCK IMPACT

• Weakness still persists. Sequentially, core earnings in 2Q18 contracted by 10.2% qoq on the back of lower revenue (-2.7% qoq) and higher operating expenses (+4.0% qoq). Apart from Sungei Wang Plaza, properties which have been reporting negative rental reversion over preceding rental reversion include The Mines (-5.0%), 3 Damansara (- 4.0%) as well as Tropicana City Office Tower (-5.1%). This was partially mitigated by a moderate improvement in rental reversion at Gurney Plaza (4.1%) and East Coast Mall (+1.8%). Operating expenses increased in 2Q18, attributable to higher assessment fees, marketing expenses, maintenance as well as reimbursable staff costs. This has led to lower net property income margin of 61% in 2Q18 vs 64% in 1Q18.
• Slight decline in occupancy rate. At portfolio level, occupancy rate fell from 93.7% in 1Q18 to 91.5% in 2Q18. The lower occupancy rate in 2Q18 was mainly driven by Sungei Wang Plaza (from 80.0% in 1Q18 to 73.1% in 2Q18) as well as The Mines (from 94.8% in 1Q18 to 90.3% in 2Q18).
• Remain cautious for 2H18. We remain cautious on CMMT’s 2H18 outlook as the portfolio rental reversion continues to be unfavourable, and occupancy rate is also at risk given supply glut.

EARNINGS REVISION/RISK

• Revised earnings forecasts. In view of the sluggish outlook, we have cut our 2018-20 earnings estimates by 11%, 14% and 14% respectively as we have assumed lower rental reversions at The Mines, 3 Damansara and Tropicana City Office Tower, as well as higher property operating expenses.

VALUATION/RECOMMENDATION

• Downgrade to SELL with a lower target price of RM1.00 (previously RM1.15) post the downward earnings forecast revision. Our target price is based on a dividend discount model (required rate of return: 7.85%, terminal growth: 1.0%)

SHARE PRICE CATALYST

• Organic growth via asset enhancement exercises and realignment of rental rates.
• Inorganic growth from acquisitions.

Source: UOB Kay Hian Research - 26 Jul 2018