CMMT’s 9M18 core net profit of RM102.2m (-15.0% YoY) was below ours and market expectations. Overall decrease was mainly due to downtime in SW, TM and ECM, and lower rental rates and occupancy in its Klang Valley malls. However, these were partially offset by the improved performance from GP and ECM. We cut our FY18-20 forecasts by 10%-11% to incorporate lower occupancy and higher operating expenses but maintain our HOLD call with lower TP of RM1.20 (was RM1.34).

Below expectations. 9M18 revenue of RM263.2m (-4.9% YoY) translated into a core net profit of RM102.2m (-15.0% YoY). The results were below both ours and consensus’ expectations, accounting for 66.2% and 66.0%, respectively.

Dividend. None declared as dividend is usually payable semi-annually.

QoQ/YoY. Revenue for 3Q18 of RM86.2m (-1.4% QoQ, -7.0% YoY) translated to core net profit of RM31.6m (-5.6% QoQ, -21.3% YoY). The decline was essentially due to lower revenue caused by lower occupancy rate at Sungei Wang (SW), The Mines (TM) and 3 Damansara (3D). SW especially, was affected by the downtime from asset enhancement initiatives (AEIs) works meanwhile, TM was affected by the lower rental rates. Nevertheless, the decrease was slightly mitigated by improved performance from Gurney Plaza (GP) as well as East Coast Mall (ECM) upon completion of its AEI works. On the other hand, property operating expenses increased (+1.2% QoQ; +5.6% YoY) mainly attributed by the rise of assessment fees at GP, higher utility expenses due to electricity tariff surcharge and higher property maintenance. Besides, the increase in finance costs (+1.1%) was caused by higher interest expenses from additional revolving credit facilities drawn down for capital expenditure works as well as higher cost of debt post OPR hike back in January 2018.

YTD. 9M18 revenue of RM263.2m declined by 4.9% YoY. Mainly, the drop was contributed by (i) downtime from AEIs works at SW, TM and ECM, (ii) lower rental rates and occupancy were achieved at SW and TM and (iii) tenant renovation downtime at Tropicana City Office Tower. However, the decrease was slightly mitigated by better contribution from GP and ECM on the back of higher rental rates as well as the one-off compensation and forfeiture or rental deposit for premature termination of a mini anchor tenant at SW. However, the decrease of core net profit of 15.0% was more drastic, which was mainly due to higher property operating expenses and financial costs. The increased in property operating expenses was mainly due to (i) one-off additional property assessment fees for prior years and increase in current year’s assessment fees at GP, (ii) higher marketing expenses was incurred for renaming exercise at 3D (formerly known as Tropicana City Mall) and (iii) higher reimbursable staff costs. Meanwhile, the increase in finance costs was due to higher interest expenses post OPR hike in January.

Occupancy and gearing. Both occupancy rate and gearing remains unchanged at 92% and 33% respectively.

Forecast. We cut our FY18-20 earnings forecasts by 10.6%, 11.1% and 11.4% respectively after incorporating lower occupancy rate and higher operating expenses.

Maintain HOLD, TP: RM1.20. We maintain our HOLD recommendation with lower TP of RM1.20 from RM1.34 based on targeted yield of 6.0% which is derived from 2 years historical average yield spread of CMMT and 10 year MGS. Despite the upside, we remain HOLD due to no immediate catalyst. There is a potential downside risk in DPU following the exit of an anchor tenant in SW and we expect low occupancy from long downtime due to AEIs works and negative rental reversion.

Source: Hong Leong Investment Bank Research - 25 Oct 2018