BNM cut its Overnight Policy Rate (OPR) by 25bps to 3.0%. We believe BNM in taking a pre-emptive action to support the country’s domestic demand from downside risks to global growth; we do not expect further OPR cuts for the remainder of 2019. Overall, we believe that the market has somewhat priced in an OPR cut, as reflected in the MGS yield compression and healthy investor appetite for defensive yielding assets. As such, we do not expect this OPR cut to have a material impact on MREIT share prices. Maintain NEUTRAL; our top picks are AXRB, YTLREIT and SREIT.

OPR Cut by 25bps to 3.0%; Not Expecting Further Cuts in 2H19

Bank Negara Malaysia (BNM) cut its Overnight Policy Rate (OPR) by 25bps to 3.0%, after holding the rate steady at 3.25% since January 2018. This was the first policy rate cut since July 2016. BNM maintained its cautious tone on the global growth outlook, where it cited that risks remain tilted toward the downside, stemming from unresolved trade tensions and prolonged country-specific weaknesses in the major economies, which will dampen global trade and investment activities. We believe BNM is taking a pre-emptive action to support the country’s domestic demand from downside risks to global growth. Our Economic Research Team expects BNM to keep its OPR unchanged at 3.0% throughout 2019.

Positive, But Small Impact on MREIT Earnings

The OPR cut should lower finance costs and lift earnings, but the impact is minimal as half of the MREITs under our coverage (KLCCSS, IGBREIT and YTLREIT) have the majority of their borrowings pegged at a fixed rate, while the others (AXRB, SREIT, PREIT) have partly hedged their 2019- 20E interest exposure. AXRB has the highest sensitivity to an OPR cut - we estimate that a 25bps cut in the OPR lifts its full-year EPU by 1.5%.

Cut Is Partly Priced In; Impact on MREIT Prices Likely Muted

We believe the OPR cut is somewhat priced in – 61% of the economists surveyed by Bloomberg had predicted an OPR cut and the 10-year MGS yield has compressed by 31bps in ytd to 3.76%, partly in anticipation of the OPR cut.

Stay Neutral; Top Picks Are AXRB, YTLREIT and SREIT

We maintain our NEUTRAL rating on the MREITs. We expect 2019 to be a firmer year for the MREITs – positive consumer sentiment supports retail REITs, stable (or lower) OPR helps lower finance costs while declining MGS yields may lift asset prices. For exposure, we like AXRB for its sector-leading earnings growth, YTLREIT for its high yield and SREIT for its diversified asset base. Key upside risk: further cut(s) in the OPR; downside risk: weaker-than-expected earnings.

Source: Affin Hwang Research - 8 May 2019