KEY INVESTMENT HIGHLIGHTS

• 1HFY20 earnings below expectations

• Net profit for 1HFY20 fell 63.0%yoy to RM19.5m

• 2QFY20 likely the trough, focusing on maintaining occupancy rate

• Earnings forecast cut by 20% for FY20E

• Maintain NEUTRAL with an revised TP of RM0.63

1HFY20 earnings below expectations. CapitaLand Malaysia Mall Trust’s (CMMT) 1HFY20 core net income of RM19.5m came in at 25% of ours and 24% of consensus’ full year estimates. The negative deviation can be attributed to the steeper than expected rental assistance given to tenants during the period. During the quarter, CMMT has announced an interim dividend of 1.0sen.

Net profit for 1HFY20 fell -63.0%yoy to RM19.5m as revenue fell -28%yoy to RM124.4m. This can be attributed to rental assistance of up to RM35m offered to its tenants. We understand that about 80% of the rental assistance budgeted earlier has been deployed and no further rental assistance is budgeted other than the RM35m allocated. Sungei Wang Plaza (SWP) net property income (NPI) in 1HFY20 fell to –RM1.4m from RM0.7m. Meanwhile, NPI for 3Damansara was -57%, The Mines at -54%, East Coast Mall at -37% and Gurney Plaza at -36%. Overall portfolio NPI was down by 43%yoy.

2QFY20 core net income (CNI) dived -99%yoy to RM0.2m while revenue slid by -41%yoy to RM50.0m. This was largely due to the significant rental waivers provided for the non-essential services tenants due the Movement Control Order (MCO). Topping that are lower car park income and lower occupancy rates due to the uncertainties caused by the pandemic. Sequentially, CNI plunged at a similar rate by -99% while revenue declined by -33%qoq. This was mainly due to longer operating period in 1Q compared to 2Q. Recall that the MCO started on 18 March while most non-essential businesses are allowed to re-open in early May. Monthly shopper traffic has been improving to more than 2 million in June from about 500,000 in April. We think that the second quarter might be the worst in view of the reopening of economy and resumption of consumer activities that include visiting the malls. On top of that, we believe that since much of the rental assistance has been deployed, rental income for coming quarters should also be recovering.

Negative rental reversion is highly likely to retain tenants. Management updated that about 30% of its expiring lease has been renewed and that there is about 38% of lease expiring in 2HFY20. Rental reversion for CMMT’s portfolio was -1.2% in 1HFY20 and we think that there is a possibility that it may be steeper in 2HFY20 as the REIT manager targets to maintain overall occupancy rate at close to 90%. As of end-June, portfolio occupancy rate stood at 88.3%. During the period, Gurney Plaza and ECM continue to garner positive rental reversion at 4.0% and 4.6% respectively. The Mines shopping mall’s rental reversion was -22.6% while SWP’s was at -22.6%. 3Damansara recorded rental reversion of - 1.1%. Portfolio occupancy rate slipped to 88.3%in 2QFY20 from 90.9% in 1QFY20.

Earnings forecast cut by 21% for FY20E due to the lower than expected income in 2Q20. We believe that rental income may improve gradually from FY21 onwards. We maintain our FY21F forecast at RM79.0m at this juncture in anticipation of a gradual recovery. We believe that Gurney Plaza and ECM should be holding up well as they are the leading malls in the states they operate in. As for its Klang Valley malls, competition may remain intense due to the number of malls available.

Maintain NEUTRAL with an revised TP of RM0.63 (previously RM0.69). Our TP is derived from DDM valuation with required rate of return of 8.1%. We maintain our NEUTRAL call on CMMT due to its challenging business outlook but we believe that the unit price should be supported by its NAV, which stood at RM1.24 per unit. We opine that 2QFY20 might be CMMT’s worst quarter and a gradual recovery over a period of time. Dividend yield expected at 4.8%.

Source: MIDF Research - 22 Jul 2020