CMMT’s 2Q19 core net profit of RM29.6m (-8.7% QoQ, -11.4% YoY) translated to 1H19 core net profit of RM62.1m (-12.1% YoY). The result was largely in line with our expectations but slightly below market’s. Overall decrease in 1HQ19 was mainly due to downtime in Sungei Wang and The Mines, and lower rental rates and occupancy contributed mainly by its Klang Valley malls. It was partially offset by improved performance from Gurney Plaza and East Coast Mall. We reduce our FY19-21 earnings forecast by -0.6%, -0.7% and -0.7% respectively after factoring lower interest income. We maintain our HOLD call with unchanged TP of RM1.07 based on unchanged targeted yield of 6.5%.

Broadly within expectations. 2Q19 core net profit of RM29.6m (-8.7% QoQ, -11.4% YoY) translated into 1H19 core net profit of RM62.1m (-12.1% YoY). The results were broadly within our expectations but slightly below consensus, accounting for 46% and 44% of full year forecast, respectively.

Dividend. Declared semi-annual dividend of 3.22 sen per unit (1H18: 4.02 sen), going on ex on the 8th August 2018.

QoQ & YoY. Revenue for 2Q19 of RM84.8m (-3.5% QoQ, -2.9% YoY) translated to core net profit of RM29.6m (-8.7% QoQ, -11.4% YoY). The drop was essentially caused by downtime from asset enhancement initiatives (AEI) works at Sungei Wang (SW) and The Mines (TM) along with lower rental rates and occupancy at both the locations. However, it was slightly mitigated by better performance from Gurney Plaza (GP) and East Coast Mall (ECM). Finance costs increased (+2.3% QoQ, +1.9% YoY) mainly due to higher interest expenses from additional revolving credit facilities drawn down for capital expenditure works; this was incurred mainly at SW for the Jumpa retail layout design and configuration works.

YTD. Revenue for 1H19 of RM172.8m declined by 2.4% YoY while core net profit of RM62.1m showed a decrease of 12.1% from RM70.7m in 1H18. Primarily, the decline was contributed by downtime from AEIs works at SW and TM as well as lower rental rates and occupancy were achieved at both the locations. Nevertheless, the decrease was slightly offset by higher rental rates from GP and ECM. Both property operating expenses and finance costs were higher, which also contributed to the decline. The increased in property operating expenses was mainly due to higher utilities at GP, ECM and 3 Damansara Property (3DP) as a result of electricity surcharge (effect from June 2018). Meanwhile, the increase in finance costs was from additional revolving credit facilities drawn down for capital expenditure works which was mainly at SW for Jumpa retail layout design and reconfiguration works.

Occupancy and gearing. CMMT’s occupancy rate declined in 2Q19 to 90.9% (1Q19: 92.5%) while gearing declined slightly to 33.6% (1Q19: 33.8%).

Outlook. We expect better 2H contribution with the expectation of the opening of SW’s new annex Jumpa in 3Q19. We remain cautious on TM, with an exit of an anchor tenant, however, management guided that they are in advanced negotiations and confident that a new tenant will replace the space in 3Q19.

Forecast. We maintain our forecast as the results were largely in line.

Maintain HOLD, TP: RM1.07. We maintain our HOLD recommendation with unchanged TP of RM1.07 based on targeted yield of 6.5% which is derived from 2 years historical average yield spread of CMMT and 10 year MGS.

Source: Hong Leong Investment Bank Research - 26 Jul 2019