CMMT’s 1Q20 core net profit of RM19.3m (-40.3% QoQ, -40.7% YoY) were below ours and consensus expectations. Overall decrease was mainly due to rental waiver given during the MCO period. We slashed our earnings by 43%, 20% and 6% for FY20-22 after accounting lower rental income contribution. Downgrade to SELL with a lower TP of RM0.68 (from RM0.85).

Below expectations. 1Q20 core net profit of RM19.3m (-40.3% QoQ, -40.7% YoY) were below ours and consensus expectations, accounting for 16-17% of respective full year forecasts. The deviation was due to (i) 14-day rental waiver given to shopping mall tenants under the non-essential services; (ii) lower car park and marketing communication income as well as lower recovery of utilities; and (iii) lower occupancies across malls during the MCO period.

Dividend. Declared 1Q20 dividend of 0.98 sen (1Q19: 1.71 sen), to be paid together with 2Q20 dividend later, as dividend is usually payable semi-annually.

QoQ. Gross revenue was down by 13.1% to RM74.5m due to lower rental income (- 12.2%), car park income (-13.8%) and other revenue (-17.5%), no thanks to rental waiver during MCO period. In turn, net property income (NPI) contracted by 21%, resulting in drop of net profit by 40.3%.

YoY. Top line decreased by 15.2% due to (i) 14-day rental waiver given to shopping mall tenants under the non-essential services during the MCO; (ii) lower car park and marcom income as well as lower recovery of utilities during the MCO period; and (iii) lower occupancies at Klang Valley malls. Property operating expenses remained flat (+0.1%) as higher maintenance and marketing expenses at JUMPA and higher adhoc repair expenses at 3 Damansara property, were mitigated by lower utilities expenses across all the malls during the MCO period. Consequently, this has brought down NPI by 25.4%; and thus contracted core net profit by 40.7%

Other updates. CMMT has granted rental relief in a form of rebates of up to RM35m to support affected tenants. The first tranche of support includes 14-day rental waiver (from 18-31 Mar 2020) during the first phase of MCO while the second tranche of rental relief will be decided later in staggered manner on a case-to-case basis. Occupancy rate has gone down to 90.9% (from 93.8% in 4Q19). Furthermore, shopper traffic has also declined by 20.4% YoY due to Covid-19 and MCO.

Outlook. We remain cautious on CMMT’s near term outlook as Covid-19 and MCO/CMCO will exert further rental rebates for the management, coupled with their weak rental reversion that have been in negative territory for quite some time. The newly opened JUMPA will also be affected by this crisis. We reckon that CMMT will be affected more profoundly in 2Q20 due to prolonged rental supports for non essentials retail tenants during the MCO/CMCO period.

Forecast. We slashed our earnings by 43%, 20% and 6% for FY20-22 after accounting lower rental income contribution, lower car park income as well as other revenue.

Downgrade to SELL with a lower TP of RM0.68 (from RM0.85). To note, our TP is based on FY21 DPU and targeted yield of 6.6%, derived from 2 years historical average yield spread of CMMT and 10 year MGS. CMMT’s near term outlook remains unexciting due to the negative repercussion of Covid-19 and MCO/CMCO coupled with headwinds of negative rental reversion on some of CMMT’s assets.

Source: Hong Leong Investment Bank Research - 28 May 2020