9M17 realised distributable income (RDI) of RM126.6m met both our and market expectations at 73% and 76%, respectively. No dividends as expected. We maintain our earnings estimates of RM174-178m for FY17-18. We like CMMT as most downsides have been priced in and valuations are attractive (at 6.0%/5.4% gross/net yields) vs. peers (5.5%/5.0% gross/net yields). Maintain OP and TP of RM1.63 on FY18E GDPS and an unchanged +1.40ppt to our 10-year MGS target of 4.00%.

9M17 realised distributable income (RDI) of RM126.6m came in within both our and consensus expectation at 73% and 76%, respectively. No dividends as expected.

Results highlight. YoY-Ytd 9M17 GRI declined slightly by 0.8% mainly due to: (i) lower GRI at Sungei Wang Plaza (SWP) on negative reversions but better than 1Q and 2Q 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 lower occupancy at the office tower, but this was mitigated by contributions from Gurney Plaza and East Coast Mall. All in, RDI declined marginally by 1.4% as EBIT margin was flattish at 59.5%. QoQ GRI was flattish at 0.9% on stable occupancy of 95.8% and as rental reversions improved to -1.8% (vs. -4.5% in 2Q17). This translated to bottom-line growth of 1.1% as EBIT margin was also stable at 59.5%.

Outlook. Management plans to spend c.RM30m on capex in FY17 for general refurbishment at GP and TCM, and RM70m in FY18 for Sungei Wang Plaza and ECM, which we have imputed into our estimates. FY17-18 will see 43-34% of leases up for expiry, of which we expect modest single-digit reversions. Meanwhile, TM may continue to see weak reversions, while SWP may not see positive rental reversions in the near term which we have already accounted for in our forecasts but we expect it to continue improving now that the MRT1 is operational, and further on improved mall accessibility in FY18.

Maintain OUTPERFORM and TP of RM1.63. We reiterate our OUTPERFORM call and TP based on FY18E GDPS/NDPS of 8.8 sen/7.9 sen, on an unchanged +1.40ppt spread to the 10-year MGS target of 4.00%. Our FY18E target gross yield of 5.4% (net: 4.8%) is slightly higher than sizeable retail based MREIT peers’ average of 5.1% due to negative sentiment of weak reversions on two assets. Additionally, most of the downside risks for CMMT have been factored into our earnings and valuations, while a potential catalyst is recovery in reversions mostly at SWP now that the MRT1 is completed. That said, we are comfortable with our OP call as valuations appear attractive at 6.0% gross yields (5.4% net yields) currently vs. its peers of 5.5% (5.0% net yields), while the MGS remains below out target at 3.9%.

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 - 26 Oct 2017