Period

1Q16

Actual vs. Expectations

1Q16 realised distributable income (RDI) of RM42.9m came in within expectations, making up 25% of both our and consensus expectations.

Dividends

None, as expected.

Key Results Highlights

YoY-Ytd, 1Q16 GRI grew by 15.6%, attributable to: (i) contribution from inclusion of new assets, Tropicana City Mall and Office (TCM & TCOT) on 10th July 15, and (ii) higher rental reversions on all assets except Sungei Wang Plaza (SWP) which continued to be affected by on-going MRT1 works and closure of BB Plaza. EBIT margin was reduced slightly by 0.9ppt to 59.6%, mainly due to inclusion of TCM & TCOT property operating expenses. We note that higher financing cost (+26.6%) on the back of: (i) drawdown of term loan to part finance the acquisition of TCM & TCOT, (ii) additional revolving credit facilities being drawn down for CAPEX, and (iii) higher interest expense on floating-rate credit facilities weighed down on RDI, which only increased by 7.2%. However, DPU declined by 5.8% due to the placement for TCM & TCOT in 3Q15.

QoQ, topline was flattish but RDI increased marginally by 1.4%, mainly due to lower expenditure (-3.1%), lower financing costs (-1.3%) and higher interest income (+4.0%).

Outlook

CMMT has spent RM5.2m YTD on capex. In FY16, management allocated c.RM60m for capex and Gurney Plaza and TCM’s Asset Enhancement Initiatives (AEIs) (refer overleaf).

FY16 will see 33.9% of portfolio NLA up for expiry, mostly in Gurney Plaza (14.4% of portfolio NLA).

Sungei Wang Plaza may not see positive rental reversions pending the completion of construction works for MRT1 by 2H17.

Change to Forecasts

We make no changes to our FY16-17E earnings estimates. We are estimating gross yields for FY16-17E at 5.8-6.1% (net: 5.2-5.5%).

Rating

Upgrade to MARKET PERFORM (from UP)

Valuation

We upgrade CMMT to MARKET PERFORM (from UNDERPERFORM) as we believe the market has largely priced in concerns on earnings risk arising from SWP, which has started to show improvement in occupancy rates in 1Q16. Moreover, we expect SWP’s rental reversions to improve closer to MRT completion in 2017. However, pending for confirmation of recovery in reversions, we are comfortable with the MARKET PERFORM call for now.

In view of this, we reduced our target gross yield spread to 2.1ppt (from 2.5ppt), based on its 1-year average gross yield spread to our target 10-year MGS of 3.80%. Hence, our TP is upgraded to RM1.45, based on target gross yield of 5.9% (net: 5.3%) on FY16E GDPS of 8.5 sen (previously TP of RM1.35 on target gross yield of 6.3%).

Risks to Our Call

Bond yield expansion

Lower-than-expected rental reversions

Lower-than-expected occupancy rates

Source: Kenanga Research - 15 Apr 2016