1Q19 realised distributable income (RDI) of RM35.0m came in well within expectation at 22% of our estimate and 24% of consensus’. No dividends, as expected. Maintain FY19-20E CNP of RM160-161m. Going forward, we expect mildly negative to low single-digit reversions on leases expiring in FY19-20. Maintain OP and TP of RM1.25 given attractive FY19E gross yield of 7.0%, which is above MREIT peers’ average of 5.6% post pricing in most risks.

1Q19 realised distributable income (RDI) of RM35.0m came in within our and consensus expectations at 22% and 24%, respectively. No dividends, as expected.

Results highlight. YoY, top-line was down by 2.0% due to: (i) downtime from asset enhancement works at Sungei Wang Plaza (SWP) and The Mines (TM), (ii) lower occupancy at SWP, TM and 3 Damansara (previously known as Tropicana City Mall), and (iii) lower reversions at SWP and TM. The positive reversions at Gurney Plaza (GP) and East Coast Mall (ECM) were not sufficient to offset the top- line weakness. This coupled with (i) higher operating cost (+7.5%) from higher utilities consumption and reimbursable staff cost and (ii) higher financing cost (+1.5%), resulted in RDI declining by 15.2%. QoQ, top- line was up by 1.1% on positive reversions and stable occupancy at most assets save for The Mines and 3 Damansara. However, higher operating cost (+3.1%), lower interest income (-2.5%) as well as lower distribution adjustments (-37.9%) which are typically lower in 1Q resulted in RDI declining by 13.5%.

Outlook. Management plans to spend c.RM30-20m on capex, mainly for the refurbishment of Sungei Wang Plaza and regular maintenance in FY19 and for AEI works at Gurney Plaza in FY20. FY19 will see 39% of NLA up for expiry (as at end March 2019) while we expect c.30% of NLA expiring in FY20. Note that CMMT’s lease expiries are on a staggered basis of c.30% per annum. SWP may see weak rental reversions in the near term of which we have already accounted for, but we expect recovery mostly in 2H19 on: (i) post completion of SWP AEIs by end 1H19, and (ii) improved reversions in 2H19 post AEIs and introduction of new and smaller tenants.

Maintain FY19-20E CNP of RM160-161m, as we factored in mildly negative to low single-digit reversions on leases expiring in FY19-20, while we expect portfolio occupancy to pick up to 95% (from 93% currently). Our FY19E/FY20E GDPU/NDPU of 7.8-7.9/7.1-7.1 sen implies gross yield of 7.0/7.0% (net yield of 6.3/6.3%).

Maintain OUTPERFORM and Target Price of RM1.25 on FY19E GDPS/NDPS of 7.8 sen/7.1 sen and a +2.40ppt spread to the 10-year MGS target of 3.90%. We have applied the highest spread among retail MREITs under our coverage (+1.4ppt to +1.8ppt) to serve as a buffer for CMMT’s marginally weaker asset profile from negative reversions, concerns of oversupply of retail space given that CMMT does not own any prime assets. Reiterate OUTPERFORM as we believe we have priced in most downside risks into CMMT’s earnings as well as valuations, while there may be recovery potential from better reversions over the longer run, post AEIs. At current levels, CMMT is also commanding attractive gross yield of 7.0%, above-average large cap retail MREITs’ yield of 5.6%.

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 - 24 Apr 2019