Offers an attractive yield of 7.7% after YoY share price decline of 29%, a 23% discount to its NAV and below IPO of RM1.08. YTD 9M18 earnings and dividends have consistently come in within our expectations, but to address investor concerns, we lowered FY18-19E earnings by 3% each on lower occupancy at SWP and The Mines. Maintain OUTPERFORM (but on a lower TP of RM1.15 from RM1.25) given attractive gross yield vs. peers’ average of 6.2%.

Offers attractive gross yield of 7.7% at current levels as share price has been severely bashed down (-29% YoY), receding below its IPO price of RM1.08 (in 2010). This is more severe than the KLREI Index (- 6% YoY) and is the worst fall amongst MREITs under coverage (+8% to -13% YoY), likely due to reversion weakness for some assets (i.e. SWP, The Mines and 3 Damansara). CMMT is trading at a 23% discount to NAV per unit vs. large retail MREIT peers of 14-61% premium to NAV, evoking investors’ concerns of future earnings potential and asset stability. However, we believe the sell-down is overdone and do not expect the Group’s NAV to decline severely in the near term as its NAV has been increasing marginally YoY despite the negative reversions, and on the back of positive portfolio fair value gains, while we believe we have accounted for most of the risk in our earnings and valuations.

Earnings and dividends, CHECK! CMMT’s results have come in within expectations for five consecutive quarters, while recent 9M18 distributable income of 5.92 sen made up 73% of our FY18E GDPS. As dividends are paid out semi-annually, expect 3Q and 4Q18 dividends of c.3.8 sen to be paid out by Feb 2019, implying 3.7% gross yields over one month.

Reversion improvements going forward? Tough reversions and declining occupancy rates for The Mines and SWP (both within our expectations), caused top-line to decline by 5% YoY in 9M18. We expect 3Q and 4Q18 to be the weakest quarters due to ongoing AEIs, but even so, 9M18 results have met expectations. As AEIs will mostly be completed by 4Q18, save for SWP’s AEI by 2H19, we expect reversions and occupancy to improve going forward, mostly from 2H19 onwards (refer overleaf).

Lower FY18-19E RNI by 3-3% as we assume lower occupancy for SWP to 65% (from 75%), and lower occupancy at The Mines to 80% (from 90%), as we opt to be conservative in light of refurbishment works and tenant remixing at the malls. Our portfolio reversion assumptions of -3% is maintained for now. Our FY18-19E GDPU/NDPU of 7.8-7.8/7.0- 7.0 sen implies gross yields of 7.7/7.7% (net yields of 6.9/7.0%).

Maintain OUTPERFORM on a lower TP of RM1.15 (from RM1.25). We reiterate our OUTPERFORM call despite a lower TP due to a marginally lower FY19E GDPS/NDPS of 7.8 sen/7.0 sen,(from 8.1 sen/7.3 sen) and a higher spread of +2.60ppt (from +2.40ppt) to the 10- year MGS target of 4.20%. Our applied spread is the highest among retail MREITs under our coverage (+1.4ppt to +2.6ppt) to serve as a buffer for CMMT’s slightly weaker asset profile from negative reversions, concerns of oversupply of retail space and buffer for fluctuations to the MGS. Even so, we are comfortable with our OP call as we believe our assumptions are conservative as we have priced in most downside risks to earnings and valuations, while there may be recovery potential from better reversions, post AEIs. However, weak earnings and declining portfolio fair value may prompt us to increase our spreads. CMMT commands attractive gross yield of 7.7% (vs. MREIT peers of 6.2%), while we noted that share price had gained 25% within three months (from March to June 2018) leading up to the 1H18 dividend payout.

Source: Kenanga Research - 03 Jan 2019