1Q17 realised distributable income (RDI) of RM42.3m met both our and market expectations at 23% and 24%, respectively. No dividends, as expected. However, we lower earnings by 4-4% for FY17-18E upon reducing reversions closer to current levels. We maintain our MARKET PERFORM rating but sliced TP to RM1.59 (from RM1.62) on lower earnings and FY18E GDPS on a +1.30ppt spread to our 10-year MGS target of 4.20%.

1Q17 realised distributable income (RDI) of RM42.3m came in within both our and consensus expectation at 23% and 24%, respectively. No dividends, as expected.

YoY down slightly on weaker reversions. YoY-Ytd 1Q17 GRI declined slightly by 1.3% mainly due to: (i) lower GRI at Sungei Wang Plaza (SWP) on negative reversions, (ii) lower GRI at The Mines (TM) due to negative reversions and lower occupancy, and (iii) lower GRI at Tropicana City Mall (TCM) due to negative reversions, but the impact was mitigated by contributions from Gurney Plaza. All in, RDI declined by 1.4% as EBIT margin was flattish at 59.4%. QoQ, GRI declined by 1.1% due to similar reasons mentioned above, which mostly flowed through to bottom-line (-0.8%) as margins remained flattish.

Outlook. Management is targeting to spend c.RM30m on capex for general refurbishment and AIE at GP and TCM in FY17, which is within our assumptions. FY17 will see 43% of leases up for expiry, mostly from GP and ECM which we expect modest single-digit reversions. Meanwhile, TCM, TM and SWP may not see positive rental reversions in the near term which we have already accounted for, but we expect the negative rental reversion situation for SWP to improve closer to completion of construction works for MRT1 by end FY17.

Lowering FY17-18E earnings by 4% each. We lower FY17-18E by 4% each to RM174-178m account for lower reversions for TCM, TM and GP and slightly lower occupancy at TM (refer overleaf). Our FY17-18E GDPU are 8.5-8.8 sen, translating into 5.4-5.5% yield.

Maintain MARKET PERFORM but lower TP to RM1.59 (from RM1.62). We reiterate our MP rating but lower TP to RM1.59 (from RM1.62) post lowering earnings estimates and rolling forward of valuations to FY18E GDPS/NDPS of 8.8 sen/7.9 sen, and target gross/net yield of 5.5%/5.0% on an unchanged +1.30ppt spread to the 10-year MGS target of 4.20%. Our FY18E target gross yield of 5.5% (net: 5.0%) is above sizeable retail MREIT peers? average of 5.4% pending further improvements in reversions from SWP, as well as TCM and TM. We are comfortable with our MARKET PERFORM call for now as most of the downside risks have been priced in and pending confirmation of recovery in reversions largely at SWP closer to completion of MRT1 in 2H17.

Risks to our call include: (I) bond yield expansions, (ii) lower-than- expected rental reversions, and (iii) lower-than-expected occupancy rates.

Source: Kenanga Research - 19 Apr 2017