We came away from CMMT’s conference call briefing yesterday feeling neutral. Operationally, occupancy was flattish at 97.0% on mildly positive rental reversions of +1.9%, dragged down by SWP (- 26.3%). TCM and TCOT acquisitions and related placement were completed recently (10th July 2015), but are only DPU accretive in the longer term (post FY17). We lowered FY15-16E earnings by 3.9%-5.1% on the back of lower interest income estimates, weaker SWP rental reversions, and lower occupancy at The Mines, which resulted in FY15-16E dividend yields of 6.0%-6.3%.

Maintain UNDERPERFORM with TP to RM1.33 (from RM1.42). Flattish occupancy on positive rental reversions. CMMTs’ portfolio occupancy was flattish, declining slightly to 97.0% (-0.5ppt QoQ) (refer overleaf). Portfolio rental reversions were mildly positive at +1.9%. This is slightly lower than 1Q15 of 3.6% due to worsening rental reversions at SWP of -26.3% due to on-going MRT1 construction work surrounding the mall and closure of BB Plaza. Going forward, management aims to prioritise occupancy over rental reversions. As a result, we have lowered SWP’s FY15-16E rental reversions to -30% (from -10%), which only decreased our topline by -1% or RM3.6m-RM3.8m in FY15-FY16E. As a result, we are not overly concerned by the negative reversions at SWP.

TCM and TCOT acquisition DPU accretive in the longer term. Management has just completed the acquisitions and related placement of TCM and TCOT on 10 July 2015, suggesting that rentals will start contributing to revenue in 3Q15, which we have already built into our estimates. Even though the placement dilution was 3.4% short of what we had initially estimated, we are still negatively biased in the near term on the acquisition as: (i) the placement is still dilutive to FY15-16E DPU to 8.8 sen-9.0 sen (from 9.2 sen-9.4 sen pre acquisition and placement), and (ii) the asset acquisitions price tag of RM540.0m appears expensive as the implied FY15E yield of the combined assets is at 5.1%, below CMMT’s other asset valuation cap rates (6.0%-7.1%), and portfolio yield of 6.5%. Post placement and borrowings, we expect FY15-16E gearing of 0.31x-0.30x (from 0.29x-0.27x pre placement and acquisition). However, we do note that both assets have earnings upsides in the longer term given CMMT’s tenant’s list and experience. (refer overleaf)

 What’s in store for TCM and TCOT? Management is still finalising minor AEI plans to enhance the look and mix of TCM, which may include adding minor NLA to the malls exterior. New tenants include F&B eateries, S.Wine by The BIG Group, and an electrical outlet. TCM appears to be positioned as a family mall, but will also cater to the office crowd on the weekdays from TCOT. Going forward, we believe that CMMT’s expertise in mall management bodes well in enhancing the value of the mall by shaping its tenant mix, as it has one with The Mines and ECM. Occupancy is currently at 91% and management expects it to increase to 95% by year-end. There were no major AEI plans for TCOT, while occupancy remains at 100%.

Lowered our FY15-16E earnings by 3.9% - 5.1% to RM166m-RM173m. CMMT’s 1H15 RNI came in slightly below our forecast, at 43.2% due to our slightly more aggressive interest income estimates (actual interest income was 35% of our 1H15) while SWP’s rental reversions were on the weak side. As a result, we have: (i) lowered our interest income estimates, (ii) trimmed SWP’s rental reversions to -30% (from -10%) for FY15-16E, and (iii) trimmed The Mines’ occupancy slightly for lower occupancy to 96% (from 99%). As a result, we have lowered our FY15-16E earnings by 3.9%- 5.1% to RM166m-RM173m. As such, DPU estimates were decreased by 1.1%-2.3% in FY15-FY16E to 8.2 sen-8.5 sen. (refer overleaf)

Maintain UNDERPERFORM with a slightly lower TP of RM1.33 as we fully roll our valuations to FY16E. We are rolling forward our valuations to FY16E (from FY15E/16E average previously) as we enter 2H15, while we would like to capture a more meaningful part of the new asset contributions as full contributions will only be felt in FY16. Our TP is based on higher target gross yield of 6.4% (net: 5.8%) on a similar FY16E GDPS of 8.5 sen (from FY15/16E of 8.5 sen). Our target gross yield is based on a higher yield spread of +2.5ppt (from +2.10ppt) to our target 10-year MGS of 3.90%. (refer overleaf)

Source: Kenanga Research - 23 Jul 2015