BNM raised its OPR by 25bps to 3.25%, we do not expect further hikes in 1H2018. The OPR hike is largely within market expectations and we expect the impact on MREITs’ share prices to be muted. The impact to MREITs’ 2018E EPS is minimal, as most MREITs have hedged their 2018E interest exposure. A further 25bps hike may, however, lower their future earnings (2019-20E) by 0-2%. Maintain NEUTRAL, top picks are YTLREIT and AXRB.

OPR Raised by 25bps to 3.25%; We Do Not Expect Further Hikes in 1H18

Bank Negara Malaysia (BNM) raised its Overnight Policy Rate (OPR) by 25bps to 3.25%, after holding the rate steady at 3.0% since July 2016. As the country’s monetary policy statement is “forward-looking”, the hike in OPR was consistent with BNM earlier guidance that “the MPC may consider reviewing the current degree of monetary accommodation”. Going forward, our Chief Economist Alan Tan believes BNM will likely maintain its policy rate at 3.25% in 1H2018. BNM will likely wait until 2H2018 to gauge the state of the Malaysian economy, before deciding on whether to raise OPR further by 25bps to 3.5%

Impact to MREITs’ 2018 EPS Is Negative, But Minimal

The impact of higher OPR to MREITs’ 2018 earnings is, in our view, negative but minimal. Half of the MREITs under our coverage (KLCCSS, IGBREIT and SREIT) have majority of their borrowings (80-100%) in fixed rate, while the others (AXRB, YTLREIT, PREIT) have largely hedged their 2018 interest exposure. We have already factored in a 25bps OPR hike in our earnings forecasts. Moving forward, a further 25bps hike in OPR may weaken the MREITs’ CY19E EPS by 0-2%. KLCCSS and IGBREIT are least exposed while SREIT and AXRB are more vulnerable to OPR hike(s).

OPR Hike Is Largely Expected, Impact to MREITs’ Prices Likely Muted

The OPR hike is within market expectations - majority (80%) of the economists surveyed by Bloomberg has predicted an OPR hike in Jan18. Hence, the impact to MREITs share prices should be muted. Historically (2010-2017), there were little correlation between MREITs’ share prices and OPR hike / cut.

Stay Neutral, Top Picks Are YTLREIT and AXRB

We reiterate our NEUTRAL rating on MREITs. We expect the MREITs’ sector DPU to grow by c.3% in 2018E, a recovery from zero-growth in 9M17, but well below historical averages. Weak consumer sentiment may continue to weigh on retail sales, while office rentals should stay suppressed due to oversupply. For exposure, we like YTLREIT for its high yield and AXRB for its exposure to the manufacturing / logistics segments.

Source: Affin Hwang Research - 26 Jan 2018