CMMT’s 3Q20 core net profit of RM26.2m (+>100% QoQ, -7.7% YoY) were above ours but within consensus expectation. Overall, we saw that 3Q20’s earnings rebounded strongly against a low base in 2Q20 coming from the rental rebates given in preceding quarter. However, we still remain cautious on CMMT’s outlook as resurgence of Covid-19 cases may affect their recovery coupled with their weak rental reversion. We cease coverage on CMMT given the lack of exciting catalysts in the near-term coupled and reallocation of our internal research resources. As such, our previous core net profit forecasts, SELL recommendation, and TP of RM0.59 should no longer be used as a reference going forward.

Above expectations. 3Q20 core net profit of RM26.2m (+>100% QoQ, -7.7% YoY) brought 9M20 core net profit to RM45.7m (-24.5% YoY). Overall, the earnings were within the street’s (74%) but above our expectations (97%). Key variance against our forecasts was due to stronger-than-expected rental revenue stemming from lower rental assistance as we were perhaps too conservative on our forecast previously. No dividend was declared as dividend is usually payable semi-annually.

QoQ. Gross revenue increased by 40.4% mainly due to the higher rental rebates given to tenants in 2Q. Although property operating expenses were lower by 4% and total overheads cost remained flattish at 1.1%, core net profit increased significantly by more than 100% to RM26.2m (from RM0.2m in 2Q20) from the lower base effect.

YoY. Gross revenue declined by 16.3% due to lower rental income (-14.5%), car park income (-14.3%) and other revenue (-27.1%), no thanks to rental waiver given during the period, lower shopper traffic and lower occupancies across its assets. Nonetheless, core net profit only showed a decrement of 7.7% due to lower property operating expenses (-15.1%) and lower total overheads (-8.0%).

YTD. Top line declined by 24.2% due to (i) significant rental rebates given to non essential services tenants during the various phases of the MCO; (ii) lower car park and marketing advertising income as well as lower recovery of utilities during the restricted movement period; and (iii) lower occupancies at Klang Valley malls. The decrease was partially mitigated by revenue contribution from Jumpa. Although property operating expenses was lower by 8.8% due to lower utilities expenses as a result of lower electricity consumption and lower marketing cost during various phases of MCO; core net profit was down by 49.5% following the relatively high operating leverage effect.

Other updates. CMMT has granted rental relief in a form of rebates of up to RM35m to support affected tenants with about 91% take up in 9M20. Portfolio occupancy rate has gone down to 86.4% (from 88.3% in 2Q20) with Tropicana City Office Tower had the biggest drop (down to 57.4% in 3Q20 from 100% occupancy rate in 2Q20). To date, CMMT has renewed over 50% of the leases due this year (28.4% of net lettable area are due for this year) and are in advanced negotiations for the remaining major expiring leases.

Outlook Although we saw that CMMT recovered significantly in 3Q20 vs 2Q20, we remain cautious on CMMT’s outlook as resurgence of Covid 19 may impact their recovery coupled with their weak rental reversion (-10.7% portfolio rental reversion with The Mines and Sungei Wang taking the biggest hit).

Cease coverage. We cease coverage on CMMT given the lack of exciting catalysts in the near-term coupled and reallocation of our internal research resources. As such, our previous core net profit forecasts, SELL recommendation, and TP of RM0. 59 should no longer be used as a reference going forward

Source: Hong Leong Investment Bank Research - 30 Oct 2020