1Q18 realised distributable income (RDI) of RM41.2m came in within expectations at 25% of both ours and consensus. No dividends, as expected. Maintain FY18-19E CNP of RM164-165m. Portfolio reversions are improving steadily and within our expectations of low single-digit to mildly negative. With most downsides priced in, valuations are attractive at 7.0% gross yield vs. peers’ 6.1%. Maintain OP and TP of RM1.30.

1Q18 realised distributable income (RDI) of RM41.2m came in within both our and consensus expectations at 25% each. No dividends, as expected.

Results highlight. YoY, top-line was down by 2.9% on lower rental rates from negative reversions at Sungei Wang Plaza (SWP) and The Mines, and lower occupancy at Tropicana City Property (TCP) and SWP. All in, RDI declined by 2.6% on higher financing cost (+2%) from additional revolving credit facilities drawn down for capital expenditure works and increase in OPR rates and offset by slightly lower expenditure (-1.7%) and interest income (-8.6%).

QoQ, top-line was down by 2.5% due to lower rental at East Coast Mall, The Mines and TCP, likely due to ongoing refurbishments. However, operating cost declined by 5.1% to a more normalised level as 4Q saw higher service charge, property maintenance and marketing expenses, while financing cost inched lower marginally by 1.0%. As a result, RDI increased by 1.1%.

Reversions finally positive at +2.2%, improving significantly from - 12.4% in 1Q17, and -1.3% in 4Q17. YoY improvements were mainly due to: (i) The Mines +0.1% (from -6.5% in 1Q17), (ii) SWP -5.8% (from -38.8% in 1Q17), and (iii) Gurney Plaza +4.6% (from +1.0% in 1Q17). Additionally, occupancy remains fairly stable at 93.7% vs. 95.0% in 1Q17. This was despite a slight decline in SWP’s occupancy to 80% (from 90% in 1Q17), which we believe is due to movement of tenants in light of refurbishments at the mall. We expected such fluctuations for the near term and thus have accounted for it, while we expect occupancy to pick up in coming quarters.

Maintain FY18-19E of RM164-165m. We expect low single-digit to mildly negative reversions on leases expiring. Our FY18-19E GDPU/NDPU of 8.0-8.1/7.2-7.3 sen suggest gross yields of 7.0/7.1% (net yields of 6.3/6.4%).

Maintain OUTPERFORM and TP of RM1.30. We reiterate our OUTPERFORM call and TP based on FY18E GDPS/NDPS of 8.0 sen/7.2 sen, on an unchanged +2.10ppt spread to the 10-year MGS target of 4.00%. Our applied spread is +0.5SD above historical averages to encapsulate investors’ concerns of oversupply issues and OPR hikes, but we may look to remove this going forward once confidence returns to the sector. We are comfortable with our call and maintain CMMT as our Top Pick as we believe most downside risks have been priced into our earnings model and valuations, while there is recovery potential from better reversions going forward, especially post AEIs. At current levels, valuations are attractive at 7.0%/6.3% (gross/net yields) vs. its retail peers (of 6.1%/5.5% gross/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 Apr 2018