FY18 realised distributable income (RDI) of RM161.3m came in within our expectation at 102% but above consensus at 112%. FY18 dividend was also within at 102%. Maintain FY19E CNP of RM160m and introduce FY20E numbers. Going forward, we expect mildly negative to low single-digit reversions on leases expiring in FY19-20. Maintain OUTPERFORM and TP of RM1.15 as FY19E gross yield of 7.4% is above MREIT peers’ average of 5.9%.

FY18 realised distributable income (RDI) of RM161.3m came in within our expectation at 102%, but above consensus at 112%. We believe the deviation from consensus estimate was likely due to conservative net margin assumptions of 40% (vs. ours of 43%). 4Q18 DPU of 3.88 sen was declared, which included a 0.74 sen non-taxable portion, bringing FY18 DPU to 7.90 sen. This also met our FY18 target (102%) of 7.8 sen, implying 7.5% yield.

Results highlight. YoY-Ytd, top-line was down by 5.1% due to: (i) downtime from asset enhancement works at Sungei Wang Plaza (SWP), The Mines (TM), East Coast Mall (ECM) and Tropicana City Office Tower, (ii) lower occupancy at SWP, TM and 3 Damansara (3D, previously known as Tropicana City Mall), and (iii) lower rental rates at SWP and TM. The positive reversions at Gurney Plaza (GP) and ECM were not sufficient to cover the top-line weaknesses. All in, RDI declined by 3.6% on higher operating cost (+2.6%) from higher assessment fees, marketing expenses, maintenance and staff costs, and mildly offset by lower expenditure (-3.7%). QoQ, 4Q18 top-line was up by 1% on positive contributions from GP, ECM and 3D, but weighed down slightly by the negative reversions at SWP and TM. Marginally lower operating cost (-1%) from better cost management resulted in RDI increasing by 4.1%.

Outlook. Management plans to spend c.RM30-20m on capex in FY19- 20. FY19 capex is mainly for the refurbishment of Sungei Wang Plaza, and regular maintenance while FY20 capex is mostly for AEI works at Gurney Plaza. FY19 will see 43% of NLA up for expiry while we expect c.30% of NLA expiring in FY20. SWP may continue to see weak rental reversions in the near term of which we have accounted for, but we expect recovery on: (i) improved mall accessibility given that MRT1 is operational, and (ii) post completion of SWP’s AEIs by 2H19.

Maintain FY19E CNP of RM160m and introduce FY20E CNP of RM161m. We expect mildly negative to low single-digit reversions on leases expiring in FY19-20, while we expect occupancy to pick up to 95% (from 93% currently). Our FY19-20E GDPU/NDPU of 7.8-7.9/7.1- 7.1 sen implies gross yields of 7.4/7.4% (net yields of 6.7/6.7%).

Maintain OUTPERFORM and TP of RM1.15. We re-emphasize our OUTPERFORM call on an unchanged TP which is based on FY19E GDPS/NDPS of 7.8 sen/7.1 sen and a +2.60ppt spread 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 marginally weaker asset profile due to negative reversions, concerns of retail space oversupply and fluctuations in the MGS. Even so, we are comfortable with our OUTPERFORM call as we believe our assumptions are conservative given that we have priced in most downside risks into CMMT’s earnings and valuations while there may be recovery potential from better reversions in the longer run, post AEIs. CMMT is commanding attractive gross yield of 7.4% (vs. average of large cap retail MREITs’ average of 5.9%), while we noted that its share price has ran up 5% since we reiterated our buy call (refer to report dated 3rd Jan 2019, “A Viable Trading Pick”).

Source: Kenanga Research - 30 Jan 2019