We believe CMMT’s share price decline (-30% YTD) has been overdone. We have decided to take a conservative stand to: (i) trim FY18-19E core earnings by 8% each year, (ii) increased our 10-year MGS spreads by +0.5ppt which results in the highest spread amongst the retail MREITs. Even so, CMMT’s yields are attractive at 8.0%. Maintain OP, despite a lower TP of RM1.35

Below IPO price, and IPO was 8 years ago! CMMT’s share price has declined 30% YTD and is below IPO of RM1.08 (in 2010). We believe investors were concerned about the oversupply of retail spaces in the Klang Valley which resulted in the following; (i) Sungei Wang Plaza’s (SWP) negative reversions of -16.9% (which has improved from -30% since FY15), and (ii) negative reversions at The Mines (TM) due to consolidation of tenants at the Digital Mart. We had previously accounted for this, expecting negative reversions at SWP (-20%) and TM (-5%), and mid-single digit reversions for CMMT’s other assets.

Asset Enhancement Initiatives (AEIs) may see some rental downtime. Our meeting with management indicates that they are actively addressing the currently challenging landscape by rejigging their tenant mix strategy. We note that its weaker assets (SWP, TM and Tropicana City Mall or “TCM”), are seeing reconfiguration of tenants space from the “large anchor tenants” into more themes and concepts, which create a variety of niche tenants; this helps to address the common saying nowadays of “all malls are the same” (refer overleaf).

All in, we maintain our capex assumptions of RM70-50m in FY18-19 as we have accounted for this, but we believe the malls may see some rental downtime during this period. Management expect most of the AEIs to be completed by 2H19, and we conservatively assume full effects of the AEIs will only be felt from FY20 onwards.

We lower FY18-19E by 8% each to RM164-165m (refer overleaf). All in, we lower our FY18-19E GDPU to 8.0-8.1 sen (from 8.8-8.8 sen).

Valuations attractive at (8.00%/7.2% gross/net yield). CMMT’s yields are also attractive post trimming earnings and widening our valuation spreads by 50 bps for all MREITs under our coverage (refer to MREITs report dated 19th March 18, ‘New MREITs Guidelines a Mild Positive’). Our spread for CMMT is the widest among retail MREITs under our coverage at 1.9ppt, and on par with SUNREIT which also faces asset weakness from the office and hotel segments. However, CMMT’s gross yields are better than all retail MREITs under coverage range of 4.8- 6.5%, while its PBV is the lowest at 0.76x (vs. MREITs peers of 0.83- 1.42x). Maintain OUTPERFORM on a lower TP of RM1.35 (from RM1.63).

We reiterate our OUTPERFORM call but lower our TP based on a lower FY18E GDPS/NDPS of 8.0 sen/7.2 sen (from 8.8 sen /7.9 sen), and a higher spread of +1.9ppt (from +1.4ppt) as we are factoring in temporary risk premiums to address concerns of OPR hikes, and maintain our 10-year MGS outlook of 4.00% (vs. current levels of 3.90%). Our applied spread is the highest among retail MREITs under our coverage (+1.3 to 1.9ppt) due to weaker reversions at CMMT’s assets and perceived earnings risk. Even assuming significantly more conservative earnings and valuations, CMMT remains attractive, warranting a strong OUTPERFORM call at current levels.

Source: Kenanga Research - 19 Mar 2018