AFFIN Hwang Capital Research has maintained its neutral call on Malaysian real estate investment trusts (MREITs) mainly due to weak earnings outlook and it remained cautious due to uncertainties in Covid-19, the movement control order (MCO) and the domestic economy.
“We expect their earnings to decline by 19% in 2020 due to the difficult business environment, but we believe the weak earnings outlook is somewhat reflected in the share prices.
“At a 5.4% 2020 distribution yield, the valuation looks fair, and we maintain our neutral rating,” said the research house in a note on April 15.
For exposure, the research house’s preferred picks are KLCCP Stapled Group (KLCCSS) with a target price (TP) of RM7.30 and IGB REIT with a TP of RM1.58 for their prime assets and strong balance sheet.
It said MREITs are actively looking at cost-cutting measures ranging from operating costs (utilities) to business-level expenses and deferring non-essential capex.
“With the exception of the hospitality segment, we do not expect the other MREITs to achieve material cost savings as most of their costs are fixed in nature,” said the research house.
However, the research house expected that a decline in the overnight policy rate (OPR) should support MREITs’ future earnings.
“We expect the MREITs to see lower finance costs but our channel checks suggest that the banks may not pass on the full reduction in the OPR rate due to the changing business (and risk) environment.
“The interest cost is a sizable expense for the MREITs. In FY19A, the net interest costs were equivalent to 19%-22% of the revenues of Axis REIT and Sunway REIT, 16%-17% for Pavilion REIT and YTL Hospitality REIT, 8% for IGB REIT and 6% for KLCCSS.
Bank Negara Malaysia has cut its OPR twice in 2020, lowering the OPR from 3% in 2019 to 2.5% currently.
While the lower OPR should support the MREITs’ future earnings, the impact on their immediate results would be relatively muted as most of them have pegged the majority of their borrowings to fixed rates except for Pavilion REIT and Sunway REIT. – April 15, 2020
