1H19 realised distributable income (RDI) of RM65.8m came in within expectations at 45% and 47% of ours and consensus, respectively. 1H19 dividend of 3.22 sen is also within expectation (45%). However, we lower earnings by 8- 6% for FY19-20 on tenant delays (as recently highlighted), tenant departure and a weaker reversions outlook. Downgrade to MP (from OP) and on a slightly lower TP of RM1.10 (from RM1.15).

1H19 realised distributable income (RDI) of RM65.8m came in within our and consensus expectations at 45% and 47%, respectively. 1H19 GDPU of 3.22 sen was declared, which included a 0.12 sen non taxable portion which also met our FY19 target (45%) of 7.2 sen, implying 6.2% yield.

Results highlights. YoY-Ytd, top-line was down by 2.4% due to weakness at Sungei Wang Plaza (SWP), The Mines (TM) and 3 Damansara from on-going negative reversions as well as mildly lower occupancy at The Mines. However, this was offset by improvements in better rentals at GP and ECM. This coupled with (i) higher operating cost (+4.5%) from higher utilities consumption, and (ii) higher financing cost (+1.7%), caused RDI to decline by 19.8%. QoQ, top-line was down by 3.5% mostly due to weakness at Sungei Wang Plaza (SWP), The Mines (TM) and 3 Damansara on negative reversions and lower occupancy at The Mines due to departure of an anchor tenant. Higher financing cost (+2.3%), and lower interest income (-18.5%) contributed to a lower RDI of 11.7%.

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, but we expect some improvements in 2H19 on: (i) completion of SWP AEIs by 4Q19 (delayed from 3Q19 previously), and (ii) improved reversions in 2H19 post AEIs and introduction of new and smaller tenants.

Lower earnings by 8-6% in FY19-20 to RM135-140m as we lower FY19E CNP due to (i) the delay in the opening of Jumpa at Sungei Wang Plaza in 1Q, (ii) lower rental at The Mines as the anchor tenant has moved out, and (iii) assuming lower portfolio reversions of -4% to 1% in FY19-20 (from -1% to 5% reversions previously). Our FY19E/FY20E GDPU/NDPU is lowered accordingly to 6.6-6.8/5.9-6.2 sen (from 7.2-7.3/6.5-6.6 sen) implying gross yield of 6.2/6.4% (net yield of 5.6/5.8%).

Downgrade to MP (from OP) on a lower Target Price of RM1.10 (from RM1.15) post lowering our earnings and rolling forward our valuation base to FY20E on a +2.40ppt spread to the 10-year MGS target of 3.70%. Note that our applied spread is the highest among retail MREITs under our coverage (+1.3ppt to +1.8ppt) to serve as a buffer for CMMT’s marginally weaker asset profile from negative reversions, and concerns of oversupply of retail space given that CMMT does not own any prime assets. We are comfortable with our MP call post accounting for recently highlighted factors contributing to lower earnings and a more conservative outlook on reversions in the near term as we expect management to prioritize occupancy over strong reversions.

Risks to our call include: (I) bond yield expansions or contraction, (ii) lower-than-expected rental reversions, and (iii) lower-than-expected occupancy rates.

Source: Kenanga Research - 26 Jul 2019