1QFY21 realised distributable income (RDI) of RM7.6m came in below our estimate (8%) and (10%) of consensus on a weaker-than-expected top-line while the outlook for coming quarters remains challenging. No dividends, as expected. Lower FY21-22E CNP by 9-5% on weaker-than-expected reversions. Maintain MARKET PERFORM but on a marginally higher TP of RM0.605 (from RM0.590) as we roll forward our valuation base to FY22E (on a +0.5SD spread) given its challenging asset profile.

1QFY21 realised distributable income (RDI) of RM7.6m came in below our estimate at 8% and consensus’ at 10% of FY21E, on a weaker-than-expected top-line (at 18%), on the back of high operating cost (28% of our FY21 estimate) which clamped RDI margin at 13% (vs. our expectations of 30%). No dividends, as expected.

Results’ highlight. YoY-Ytd, top-line was down by 24% due to weakness from all assets from the re-imposition of MCO 2.0 (from 13th Jan to 4th March) which also coincided with the Chinese New Year period. All in, CNP was down by 60% as cost did not decline in tandem with top-line, resulting in weak RDI margin of 13% (vs. 27% in 1QFY20). QoQ, top-line was down by 15% due to similar reasons mentioned above, while RDI declined by 58% due to high fixed cost (- 3.6%). Gearing remained stable at 0.36x which is below MREITs’ gearing limit of 0.60x.

Outlook. We expect gradual earnings improvement in the coming quarters in light of the vaccination roll-outs nationwide, with improvement in earnings geared more towards 2HFY21. However, for now, we believe that the near-term outlook for CMMT remains challenging and rather subdued with the current MCO, and recent rise in daily Covid-19 cases. The Group may still utilise rental assistance but the quantum is expected to be less than that in FY20. FY21 will see a large number of leases up for expiry at 41% of NLA which is risky in a challenging year, but the bulk of these expiries are in non-Klang Valley malls (at 61% of total, namely Gurney Mall and East Coast Mall which are less affected by Covid-19 at this juncture).

Lower FY21-22E CNP by 9-5% to RM87-98m on the back of slightly weaker rental reversions of -9%/-5% in FY21/FY22 (vs. -5%/-2% previously) as we believe the Group will be prioritising occupancy over reversions given its challenging mall portfolio and the fact that CMMT does not own prime malls. FY21E/FY22E GDPU/NDPU of 4.2-4.7sen / 3.8-4.2 sen imply gross yield of 6.3%/7.0% and net yield of 5.6%/6.3%.

Maintain MARKET PERFORM on a marginally higher Target Price of RM0.605 (from 0.590) as we roll forward our valuation base to FY22E on an unchanged 4.5ppt spread (+0.5SD) to our 10-year MGS target of 3.3%. The applied spread is the highest among retail MREITs under our coverage (0.9ppt to 1.6ppt) given the weakness of CMMT’s asset profile from negative reversions as CMMT does not own any prime retail malls unlike its peers, making it tougher to weather this pandemic while the concern of retail space oversupply still lingers.

Risks to our call include: (i) bond yield contraction/expansion, (ii) higher/lower-than-expected rental reversions, and (iii) higher/lower-than-expected occupancy rates.

Source: Kenanga Research - 19 Apr 2021