Investment Highlights

• It takes time for economy to regain momentum. The Covid-19 breakout has caused a major upheaval in the global economy. Malaysia’s movement control order (MCO), which has been extended to 12 May 2020, has put the economy in a pause for almost 2 months. With the MCO ending in mid-May, the economy may take a while to regain its momentum. Our in-house economist expects the Malaysian economy to fall into a technical recession in 2020, trimming Malaysia’s 2020 GDP forecast to 0.4% from 3.0% while raising 2021’s growth to 4.85% from 4.5%.

• Challenging time ahead. Essential goods and services take up about 15%–20% of shopping malls’ total net lettable area (NLA). However, their businesses are affected as well due to the thin crowds. Meanwhile, post-MCO, we believe shopping malls patrons and the occupancy of hotels will remain low due to risk of Covid-19 infection; and we expect this situation to continue to 6–8 months. We reckon industrial REITs will be negatively impacted as well due to lack of economic activities amid the upcoming global recession.

• Earnings under pressure. Retail REIT managers are adopting a proactive stance in supporting their tenants through this difficult time. We believe REIT managers will make adjustments in rental rates across the board in order to retain their tenants, resulting in a negative impact to their bottom lines and distribution to unit holders. In our previous sector reports dated 19 March 2020 and 9 April 2020, we have reduced the REITs’ FY20–FY21 earnings forecasts by more than 20% respectively to reflect the impact of the MCO and its spillover effects to the economy which may result in lower rental income. Nonetheless, after assessing the current global economic condition, we are cutting our FY20F–FY21F earnings further (Exhibit 2).

• Maintain NEUTRAL. We maintain our NEUTRAL view on the sector as the overall sentiment remains weak. We may upgrade our NEUTRAL stance for the REIT sector to OVERWEIGHT if: (i) there is a strong economic recovery; (ii) consumer sentiment is to improve significantly; and (iii) Malaysia’s tourism industry stages a strong rebound. Our valuation methodology is based on 5% target yield over CY21F distribution. We maintain our BUY recommendation on SREIT (FV: RM1.81) and YTL REIT (FV: RM1.31).

Source: AmInvest Research - 30 Apr 2020