1QFY20 realised distributable income (RDI) of RM20.1m (- 42% YoY) came in within our (20%) but below consensus (17%) expectations. No dividends, as expected. We lowered FY20E/FY21E NP by 31%/15% to RM70m/RM104m on flexible payment arrangements for tenants and asset weakness given that FY20 is a major lease expiry year. In this pandemic, the Group will be prioritising tenant assistance and cash conservation. Downgrade to UNDERPERFORM (from MP) on a lower TP of RM0.650 (with an implied FY21E yield of 7.8%) from RM0.700.

1QFY20 realised distributable income (RDI) of RM20.1m came in within our estimate at 20% but below consensus’ at 17%, likely on expectation of strong net margins of 35% vs. actual RDI margins of 27%. No dividends, as expected.

Results’ highlight. YoY, top-line dropped by 15% mainly due to the 14-day rental waiver during the MCO for all non-essential tenants in its malls as well as lower rental income from lower occupancy rate of 90.9% (vs. 92.5%). This trickled straight to bottom-line which declined by 42%. QoQ, top-line declined by 13% due to similar reasons mentioned above and on the back of lower portfolio occupancy (to 90.9% from 93.8%) at Sungei Wang Plaza, The Mines and 3 Damansara. Due to relatively unchanged operating cost, RDI margin declined by 9.3ppt, resulting in a 35% drop in RDI.

Outlook. Due to the severity and uncertainty of Covid-19 situation, the Group will be prioritising tenant assistance and cash preservation. As such, capex will be lowered to RM20m in FY20 (from RM50m), trimming non-essential marketing and operating expenses, while FY21 capex of RM20m is left unchanged. FY20 will see a large number of leases up for expiry at 46% of NLA, of which 25% has been renewed thus far at -1.1% reversion rates. We expect 30% of leases to expire in FY21.

Lower FY20E/FY21E NP by 31%/15% to RM70m/RM104m. To recap, we recently trimmed CMMTs earnings by 22/6% for FY20/FY21 in our MREITs 2QCY20 Strategy report (dated 3rd April 2020) on expectations of a prolonged MCO in 2020 and the need for rental support. However, the situation appears to be more dire than expected and as such we lower FY20 portfolio occupancy to 85% (from 90%) on pre-empted weakness at SWP, The Mines and 3 Damansara, and lower portfolio reversions to -5% (from low single-digit reversions previously) given the challenging environment in coming months. Meanwhile, we expect FY21 to see low single-digit reversions on leases renewed within that year, on portfolio occupancy of 88% (from 90% previously). FY20E/FY21E GDPU/NDPU of 3.4-5.1 sen/3.1-4.6 sen imply gross yield of 4.2%/6.2% and net yield of 3.8%/5.6%.

Downgrade to UNDERPERFORM (from MP) on a lower Target Price of RM0.65 (from RM0.70). Our TP is based on an unchanged +4.8ppt spread (-2.0SD) on our new 10-year MGS target of 3.3% (previously 3.7%) on a lower FY21E GDPU of 5.1 sen (from 6.0 sen). Our applied spread is the highest among retail MREITs under our coverage (+1.5ppt to +2.5ppt) given the weakness of CMMT’s asset profile from negative reversions and risk of lower occupancy. Furthermore, CMMT does not own any prime assets unlike its MREITs retail peers which would make it tough to weather this pandemic while the concern of retail space oversupply still lingers. That said, we may look to increase our estimates should shopper traffic and tenant sales pick up in coming months.

Source: Kenanga Research - 22 May 2020