Period     1Q13

Actual vs. Expectations     1Q13 realised net income (RNI) of RM35.8m came within expectations, making up 24% each of street and our estimates.

Dividends     None, as expected.

Key Results Highlights      YoY, 1Q13 RNI was up 4%. Topline grew 4% on the back of positive average rental reversions of 8% from preceding rental terms; Gurney Plaza (GP) and East Coast Mall (ECM) provided the strongest reversions of 13% and 15%, respectively. This was more than enough to negate increases in direct operating costs (+1%), expenses (+7%) including higher manager’s fees and finance costs (+12%) including one-off refinancing charges.

QoQ, 1Q13 topline achieved flattish growth of 1% given stable occupancy rates of 98.7%. So, RNI growth of 7% was largely driven by lower direct operating cost (-6%) from cost control management.

Outlook     Besides Sungei Wang refurbishments, ECM AEI works have also commenced at an estimated cost of RM60m (refer overleaf).

While management did not provide clarity on any near term acquisitions, CMMT is in its final leg of approvals for issuance of another 20% of its fund size (353.6m new units). We reckon this is to ensure funding is in place in case opportunities arise; CMMT tends to do fund raising exercises and acquisitions concurrently given magnitude of each asset size. The most obvious target under its parent’s books is Queensbay Mall @ Penang while CMMT is also is open to third party deals. We believe the main issue holding back M-REIT acquisitions is the mismatch between rental rates and capital values, particularly for retail spaces.

Change to Forecasts    No changes to estimates.

Rating    Maintain MARKET PERFORM

Our call is sector driven and we are NEUTRAL on M-REITs. Post GE, there is risk that investors may switch to higher beta stocks (e.g. developers). While there is a good chance of that, we are cognizant of the possibility of prolonged uncertainties post GE. Therefore we recommend that investors maintain some exposure to resilient MREITs to safe-guard against any negative surprises, implying a trading-on-weakness strategy. For CMMT, further upsides to TP hinges on yield accretive acquisitions.

Valuation     No changes to TP of RM1.90 based on target FY13E gross dividend yield of 4.4% (net: 4.0%) or a +1.4ppt spread to CY13E 10-yr MGS of 3.0%.

Risks    Risks to calls are; 1) further compressions in the 10-year MGS beyond our expected FY13E 3.0%; 2) potential yield reversals; 3) challenge of acquiring yield accretive assets.

Source: Kenanga