Investment Highlights

• Maintain OVERWEIGHT recommendation. We continue to be cautiously optimistic on the recovery of retail REITs under our coverage. While we foresee a bumpy recovery in the immediate term, dragged by the emergence of the new Covid variant Omicron, earnings visibility and associated risks of the sector have now improved compared to the earlier quarters thanks to the wide rollout of vaccines both locally and globally together with the reopening of domestic economy in stages.
  Based on our estimates, REITs under our coverage provide distribution yields of more than 5% for FY23F and beyond compared to the current low interest rate environment. We like the sector as a recovery play as it is poised to benefit from an expected rebound in Malaysia's post-pandemic economy.

• For 3QCY21, REITs’ results were largely in line with our expectations. Out of the 4 companies we cover, only IGB REIT underperformed vs. expectations.
  • IGB REIT 3QFY21 earnings missed expectations with 9MFY21 distributable income dropping by 22% YoY to RM141mil, which accounts for only 59% of our FY21F estimate and 65% of street’s. This is largely attributed to the higher-thanexpected rental rebates and reimbursement costs arising from slower recovery from the pandemic.
  • On the other hand, Pavilion REIT, Sunway REIT and YTL REIT’s results were in line with our expectations. Even so, Pavilion REIT and Sunway REIT’s earnings were dragged by the tighter lockdown in 3QCY21, as Pavilion REIT’s distributable income contracted by 6% YoY to RM78mil, while Sunway REIT’s 15MFY21 distributable income shrank by 39% YoY to RM154mil.
    YTL REIT’s distributable income of RM18mil (+6% YoY) was supported by its Australian portfolio which benefited from the participation in the government’s isolation group business programme. All in, the sector’s revenue fell by 12% YoY while distributable income contracted by 22% YoY.
  • QoQ the results were mixed. Pavilion REIT and YTL REIT both recorded flattish QoQ earnings. Pavilion REIT’s dip in revenue was partly offset by reduced utilities expenses and rebates given to tenants, whereas income from YTL REIT’s tenants was stable over the past few quarters.
    While IGB REIT’s distributable income sank by 12% QoQ, dragged by the surge in reimbursement costs and higher allowance for trade receivables, Sunway REIT’s distributable income improved strongly by 26% QoQ, thanks to the absence of doubtful debt provisions. These led to a flattish QoQ distributable income for the sector.
• Based on our channel checks, the companies under our coverage have now seen their footfall traffic recover up to 80– 110% of pre-Covid levels. Marketing activities such as promotional campaigns and exhibitions have resumed to attract the return of consumers as the festive season approaches. The recovery, however, is observed to be at a slower pace compared to last year, partly due to the slower reopening of economies as cases remain high at above 4K as compared to last year’s RMCO period, with daily active cases below 1K .

• In terms of financial health, the REITs under our coverage continue to maintain a healthy debt-to asset ratio of 23%–41% vs. 60% of the regulatory threshold (temporarily raised from 50% up to 31 December 2022 by the Securities Commission as a Covid-19 relief measure), which allows the gearing up for further acquisitions. Most of the companies under our coverage have guided that they are actively scouting for quality assets and do not rule out potential acquisitions over the next 12–18 months if any yield-accretive propositions emerge, which could drive the REITs’ medium-to-long term growth despite shortterm earnings pressure.
• Our top pick for the sector is Sunway REIT (fair value RM1.66) as we like its diversified investment portfolio (which includes retail malls, hotels, offices, plus a university and hospital), sustainable townships which create resilient footfall/traffic for its malls and the large pipeline of potential assets for future injection. Sunway REIT has also been innovative and able to respond promptly to the change in consumer demand and shopping habits amid the pandemic by rolling out initiatives such as personal shopper services online, redefining new retail space by bringing in experiential products such as entertainment and cloud kitchen as well as introducing hybrid retail which combines online and offline shopping options for the convenience of consumers.
• The risks to our OVERWEIGHT calls are: (1) slower-than-expected footfall recovery; (2) massive decline in occupancy rates due to increased competition from an oversupply of retail spaces; and (3) consumer spending/sentiments deteriorate further or recover at a weaker pace than projections from new viral variants or external events.

Source: AmInvest Research - 7 Dec 2021