Period     2Q13

Actual vs. Expectations   1H13 realised net income (RNI) of RM72.3m came in within expectations, accounting for 49% of both ours and street estimates.

Dividends    1st interim dividend of 4.35sen declared. On track to meeting our FY13E GDPU of 8.35sen (5.0% yield).

Key Results Highlights    YoY, 2H13 RNI was up 4%. Topline grew 4% on the back of positive average rental reversions of 8% from preceding rental terms. The Mines and East Coast Mall (ECM) provided the strongest reversions with 10% and 20%, which negated the increase in operating cost (+4%) and Expenditure (+6%).

QoQ, NPI was down by 2% to RM50.5m as a result of higher operating cost by 5% to RM24.1m arising from an increase in repair & replacement cost, marketing and reimbursable staff cost. However, RNI was flat  at RM36.4m (+1%) as finance cost was reduced by 15% (refer overleaf).  PAT of RM114.5m included fair value gains of RM77.9m on all assets, mainly from Gurney Plaza (GP) and The Mines, increasing NAV/unit by 4% to RM1.19. 

Outlook    CAPEX for 2H13 is likely to be RMRM50.0m which will be applied mainly on GP and ECM (refer overleaf). 

Sungai Wang is facing weaknesses in occupancy rates and rental reversions due to the on-going MRT1 construction works surrounding the mall which have disrupted traffic flow. As a result, we expect flattish rental reversions while occupancy rates may weaken slightly until the MRT1 works are done in 2017. Management has guided that they would take this opportunity to refurbish the aging mall. 

Management is still silent on asset acquisitions (e.g. Queensbay Mall) but did mention that getting good assets at 7% yield is tough to come by nowadays.

Change to Forecasts     No change to estimates. We will be monitoring SW closely and may look to tone down FY14E earnings in the near future. 

Rating  Maintain MARKET PERFORM

Our call is sector driven. We have a NEUTRAL on MREITs. Furthermore, the absence of asset acquisitions provides unexciting growth prospects. Nonetheless, CMMT is highly institutionalized in shareholdings, which offers some downside risk protection.

Valuation     No changes to TP of RM1.73 based on target FY14E gross yield of 5.1% (net: 4.6%) or a +1.6ppt spread to our CY13E 10-yr MGS of 3.5%.

Risks    Risk are; (i) potential interest rate hikes; (ii) challenging rental rates environment for fashion retailers, which would negatively impact future rental reversions; and (iii) challenges in acquiring yield accretive assets.

Source: Kenanga