Neutral On MREITS With PAVREIT Being A Standout

The recently concluded 4QCY22 reporting season unveiled little earnings surprises for Malaysia REITs (MREITs) with 20% surpassing and 80% meeting forecasts (versus all of them coming in within expectations in the preceding quarter). Of the five REITs under Kenaga’s research radar, four (namely AXREIT, IGBREIT, KLCC and SENTRAL) posted results that matched estimates while PAVREIT narrowly beat expectations by 1%.

The latest batch of earnings report cards showed that it is essentially back to business as usual for MREITs post the pandemic after getting hit badly in 2020 and 2021. Following the gradual resumption of economic activities (beginning from October 2021 onwards), the base effect has largely dissipated as reflected in the slowing quarterly sequential earnings momentum in the 4QCY22 figures.

Worth highlighting too is the steady retail spending pattern as the shopping crowd has returned. Capturing this, retail
tenant sales have predominantly exceeded the pre-pandemic thresholds at prime retail malls owned by KLCC and PAVREIT although footfall remained marginally below the 2019 levels. Meanwhile, AXREIT continued to log a high portfolio occupancy rate at 95% as of end-December 2022 riding on its niche in industrial properties. Separately, the oversupply situation in the office space especially in less prime areas continued to be felt by SENTRAL (which has seen its overall portfolio occupancy rate declined from 90% end-2021 to 77% end-December 2022, though slightly better than end-September 2022 level of 73%).

Post the 4QCY22 results season, the earnings forecasts are kept largely intact for CY23 as Kenanga has pencilled in new projections for CY24. The 10-year Malaysian Government Securities (MGS) yield – a risk-free benchmark used by us as a valuation reference to impute the corresponding yield spreads in deriving the individual target prices – has climbed back up to 4.04% currently, from a recent low of 3.74% in late January this year.

This follows its previous slide from a high of 4.55% in October last year due to initial expectations that global interest rates might have peaked already. Yet, with interest rates likely to hold up amid an elevated inflationary environment, the research house said it is maintaining the 10-year MGS yield assumption at 4.5%.

In view of the current climate, the house is maintaining its NEUTRAL sector on MREITs given the still challenging industry fundamentals. On valuation grounds, notwithstanding that its share price has risen 9.6% since the upgrade in October last year, PAVREIT remains a sector pick, offering a potential total return of 10.7% however the house remains cautious on SENTRAL.

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