CMMT’s 1Q19 core net profit of RM32.5m (-12.8% YoY) was slightly below ours and consensus’ expectations. Overall decrease in 1Q19 was mainly due to lower contributions from its Klang Valley malls, but partially mitigated by high rental rates achieved from Gurney Plaza and East Coast Mall. We cut our forecasts slightly and reflected in Annual Report figures which resulted to a revised EPS19-20 to -3.5% and -7.5% respectively. Following the dovish tone by major central banks and BNM, we revise our 10-year MGS yield assumption to 3.9% (from 4.1%) and roll forward valuation to mid FY20. We maintain HOLD call with unchanged TP of RM1.15 based on targeted yield of 6.0% (from 6.2%).

Slightly below expectations. 1Q19 revenue of RM87.9m (+1.1% QoQ, -2.0% YoY) translated into a core net profit of RM32.5m (+0.6% QoQ, -12.8% YoY). The results were slightly below ours and consensus’ expectations; 23.4% and 22.0%, respectively. The deviation was due to lower-than-expected revenue contribution.

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

QoQ. Total revenue for 1Q19 of RM87.9m increased by 1.1% compared to RM86.9m in the previous quarter. Core net profit also increased by 0.6% to RM32.5m from RM32.3m in 4Q18. The increase was thanks to improved performance from Gurney Plaza (GP) and East Coast Mall (ECM). CMMT incurred RM14.4m capex during the quarter, mainly attributed to the Jumpa retail layout design and reconfiguration works at Sungei Wang (SW), enhancement works on the F&B area at The Mines (TM) and tenancy works at ECM.

YoY. RM87.9m revenue decreased (-2.0%), followed by a decrease of core net profit to RM32.5m (-12.8%). The decline was mainly due to lower revenue caused by (i) lower occupancy rate at SW, TM and 3 Damansara (3D), (ii) lower rental rates and downtime from asset enhancement initiatives works at SW and TM, and (iii) absence of a one-off forfeiture of deposit and compensation of premature termination of a mini anchor tenant at SW back in 1Q18. Nevertheless, the decrease was slightly mitigated by improved performance from GP and ECM upon completion of its AEI works, and full occupancy attained at Tropicana City Office Tower. Finance costs were higher by 1.5% given the increased average cost of debt post Overnight Policy Rate (OPR) hike as well as higher interest expenses from additional debt drawn down for capital expenditure works. Average cost of debt for 1Q19 stood at 4.47% (1Q18: 4.44%).

Occupancy and gearing. Occupancy rate dropped slightly to 92.5% (FY18: 93.2%), while gearing increase slightly to 33.8% (FY18:32.5%).

Update on Jumpa @ Sungei Wang. Jumpa, the annex building of SW with 170k sq ft of NLA began its AEIs works since 2Q18 and it is expected to be completed by end of 1H19. It is scheduled for a soft opening in 3Q19. To date, Jumpa has advanced leasing negotiations that exceeds 50%.

Forecast. We cut our earnings forecasts slightly as well as updated our projection based on FY18 audited account. As a result, FY19-20 EPU were revised by -3.5% and -7.5%, respectively.

Maintain HOLD, TP: RM1.15. We maintain HOLD with unchanged TP of RM1.15 based on targeted yield of 6.0% (from 6.2%). Following the dovish tilt by major central banks (Fed and ECB) as well as BNM, we revise our assumption of the 10-year MGS yield to 3.9% (from 4.1%; currently at 3.9%). We also roll forward valuation to mid FY20. To note, our valuation model is based on the targeted yield of 2-year historical average yield spread between dividend yield and 10-year MGS yield.

Source: Hong Leong Investment Bank Research - 24 Apr 2019