FY17 realised distributable income (RDI) of RM167.4m met our (96%) and market expectations (100%). FY17 GDPU of 8.22 sen is also within (96%). Maintain FY18E CNP of RM178m, and introduce FY19E of RM180m. Going forward we expect modest single-digit reversions, save for SWP and TM. With most downsides priced in, valuations are attractive (at 6.3%/5.7% gross/net yields) vs. peers (5.9%/5.3% gross/net yields). Maintain OP and TP of RM1.63.

FY17 realised distributable income (RDI) of RM167.4m came in within both our and consensus expectations at 96% and 100%, respectively. 4Q17 DPU of 4.08 sen was declared, which included a 0.30 sen non-taxable portion, bringing FY17 DPU to 8.22 sen. This also met our FY17E target (96%) of 8.50 sen, implying 6.1% yield.

Results highlight. YoY-Ytd FY17 GRI was down marginally by 1% on; (i) negative rental reversions at Sungei Wang Plaza (SWP), (ii) lower rental rates and occupancy at The Mines (TM) and (iii) Tropicana City Property (TCP) on lower occupancy at the office tower and lower demand for promotional space at the mall. Additionally, higher service charge at SWP and higher property maintenance and marketing expenses dragged down NPI and RDI, both by 2.2%. QoQ GRI was flattish at -0.7%, but higher operating cost (+5.6%), likely due to similar reasons mentioned above weighed down on NPI (-4.1%). All in, RDI declined by 3.8% despite slightly lower expenditure.

Outlook. Management plans to spend c.RM70-80m on capex in FY18 for refurbishment at Sungei Wang Plaza, TM, East Coast Mall (ECM) and Gurney Plaza (GP). FY18 will see 45% of NLA expiring (8% from expiry of a mini anchor) while we estimate c.30% of NLA expiring in FY19 as CMMT’s expiries are on a staggered basis of c.30% p.a. TM may continue to see weak reversions. Meanwhile, SWP may not see positive rental reversions in the near term of which we have already accounted for in our forecasts, but we expect it to continue improving now that the MRT1 is operational, and upon improved mall accessibility in FY18.

Maintain FY18E CNP of RM178 and introduce FY19E CNP of RM180. We expect modest single-digit reversions on leases expiring, save for SWP and TM. Our FY18-19E GDPU of 8.8-8.8 sen (NDPU of 7.9-7.9 sen), suggest gross yields of 6.3-6.3% (net yields of 5.7-5.7%).

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 there is potential from recovery in reversions at SWP now that the MRT1 is completed. We are comfortable with our OP call as valuations appear attractive at 6.3% gross yields (5.7% net yields) currently vs. its peers of 5.9% (5.3% net yields).

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 - 25 Jan 2018