The Malaysia REITs (MREITs) have delivered another solid set of results – all five MREITs reported higher 6M19 earnings and DPUs, as forecasted. Notably, the prime retail assets are performing well, despite the weakened consumer sentiment. In view of the prime retail MREITs’ solid 6M19 results and the managers’ positive guidance, we are lowering the discount rate we use for selected retail MREITs and raising their target prices. We maintain our Overweight rating on the sector. For exposure, our top sector picks are KLCCSS (BUY) for its sustainable yield and AXRB (BUY) for its high yield and expansion plans. We maintain HOLD ratings on IGBREIT and PREIT – while we are positive on their earnings outlooks, the current valuations have largely priced-in the positives, we believe.

MREITs’ 6M19 Results: Earnings Held Up Well, Declared Higher DPUs

The MREITs under our coverage delivered another solid set of results: all five MREITs reported higher 6M19 realised EPU, growing by 1.3% to 19.6% yoy on: (i) positive rental reversions (PREIT, IGBREIT, KLCCSS, SREIT); (ii) contributions from newly-acquired assets (AXRB, SREIT, PREIT); and (iii) higher other income (parking, events, advertising income). AXRB saw the highest 6M19 realised EPU growth (+19.6%) driven by contributions from new assets, followed by IGBREIT’s 4.9%. Tracking higher earnings, all five MREITs have declared higher DPUs in 6M19 (+0.9% to +19.5% yoy).

Notably, the Prime Retail Assets Have Performed Admirably

The prime / established shopping malls have delivered strong 6M19 revenue growth (+4% to +5% yoy) in spite of weaker consumer sentiment and ongoing refurbishment / reconfiguration works at Pavilion KL and Suria KLCC. We attribute the divergence in the revenue trend between the prime shopping malls and their less-established peers to their strategic locations, good tenant mixes and established shopper bases with resilient spending habits. Meanwhile, managements remain positive on the prime retail malls’ business outlooks, citing higher tenant sales, especially the F&Bs and speciality shops (fashion, watches).

Stay OVERWEIGHT; Top Picks Are KLCCSS and AXRB

In view of the solid earnings from the prime-retail assets (despite weaker consumer sentiment) and managements’ positive guidance, we are cutting the discount rate for three MREITs (IGBREIT, PREIT and KLCCSS) by 20- 30 bps and raising their target prices by 4% to 6%. Notwithstanding our TP upgrades, we maintain our HOLD ratings on retail-MREITs (IGBREIT and PREIT); we believe their current valuations have partly priced-in the positives. While we also maintain our BUY rating for Sunway, for exposure, our top sector picks are KLCCSS (BUY) for its sustainable yield and Axis REIT (BUY) for its high yield and strong acquisition pipeline. Maintain OVERWEIGHT.

Source: Affin Hwang Research - 5 Sept 2019