CMMT’s 3Q19 core net profit of RM28.4m (-4.2% QoQ, -10.0% YoY) brought the 9M19 sum to RM90.5m (-11.5% YoY); which were both below ours and consensus expectations. Overall decrease was mainly due to subdued occupancy in Sungei Wang and The Mines. We cut FY19-21 earnings forecasts by 9%, 8% and 7% respectively after incorporating lower occupancy rate and maintain our HOLD recommendation with a lower TP of RM1.02 (from RM1.08) based on targeted yield of 6.3%.

Below expectations. 3Q19 core net profit of RM28.4m (-4.2% QoQ, -10% YoY) brought the 9M19 sum to RM90.5m (-11.5% YoY). The results were both below ours and consensus expectations, accounting for 68% and 72%, respectively. The deviation was due to lower revenue contribution from The Mines (TM) and Sungei Wang (SW) as a result from subdued occupancy from those malls.

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

QoQ. Gross revenue fell by 1.3% to RM83.7m, leading to core profit of (-4.2%); this was mainly due to lower car park income (-5.9%) and lower other revenue (-3.7%). Net property income (NPI) decreased by 2.3% owing to higher other operating expenses (+6.3%).

YoY. Revenue declined by 2.8% due to lower occupancies in TM and SW but slightly cushioned by better performance from Gurney Plaza (GP) and East Coast Mall (ECM) (completion of AEI). Property operating expense inched up by 0.3% due to higher utilities at GP and ECM. Branding and social media marketing costs from other operating expenses increased marginally by 1.1% mainly because of the soft launch of Jumpa (in September). Likewise, the increase in finance costs (+1.3%) was primarily due to higher interest expense on the draw down for capital expenditure works that focussed on Jumpa’s retail layout design and reconfiguration works at SW. Consequently, this has brought down NPI by 4.9% which then led to decrease in bottom-line by 10% to RM28.4m.

YTD. 9M19 revenue of RM256.5m decreased by 2.6% mainly brought down by lower occupancies in TM and SW, lower rental rates at TM and downtime from AEI at SW and TM. The drop was partially mitigated by improved performance from GP, ECM and Tropicana City Office Tower (TCOT) which was supported by higher rental rates and higher rental income. NPI fell by 6% due to increase in property operating expense (+3%) mainly from higher utilities at GP, ECM and 3 Damansara Property (3DP). Core earnings dropped by 11.5% attributed from lower interest income (-39.5%) and lower net investment income (-24.4%).

Occupancy and gearing. Occupancy rate increased slightly to 92.4% (from 90.9% in 2Q19) and gearing remains unchanged at 34%.

Outlook. Although management guided that Jumpa will contribute progressively to the portfolio NPI from 4Q19 onwards, we remain cautious on CMMT’s weak rental reversion; especially at SW and TM which faced -14% and -16% variance over the preceding rental.

Forecast. We cut FY19-21 earnings forecasts by 9%, 8% and 7% respectively after incorporating lower occupancy rate.

Maintain HOLD, TP: RM1.02. We maintain our HOLD recommendation with lower TP of RM1.02 (from RM1.08) based on targeted yield of 6.3% which is derived from 2 years historical average yield spread of CMMT and 10 year MGS.

Source: Hong Leong Investment Bank Research - 25 Oct 2019