Lower OPR Should Lift MREITs’ Valuation

BNM cut its Overnight Policy Rate (OPR) by 25bps to 2.75%, the lowest level since April 2011. We had anticipated an OPR cut in 1Q2020 but the cut in January was earlier than expected (we were expecting a cut in March 2020). Broadly, a lower OPR should lower MREITs’ finance cost and lift earnings. The impact to the MREITs’ near-term profit is however, minimal, as the MREITs under our coverage have locked in 43%-100% of their borrowings at a fixed rate. The OPR cut has triggered a 12 bps decline in the 10-year MGS yield. We anticipate the compression in the MGS yields to drive investors demand for alternative yielding assets such as MREITs, thereby re-rating the sectors’ valuation. Maintain Overweight. Our sector top picks are KLCCSS, AXRB and IGBREIT.

BNM Cut Its OPR by 25 Bps to 2.75%

Bank Negara Malaysia (BNM) decided to cut its Overnight Policy Rate (OPR) by 25 bps to 2.75%. This is its lowest level since April 2011. The market was expecting the OPR to be unchanged at 3%. BNM guided that its decision to lower the OPR was a “pre-emptive measure to secure the improving growth trajectory amid price stability”. Barring unforeseen global events (ie. worsening of the recent coronavirus (2019-nCoV) outbreak), we anticipate BNM to keep OPR unchanged throughout 2020 as it guided that the current OPR level of 2.75% is appropriate in sustaining economic growth with price stability.

Small Impact to MREITs’ Immediate Earnings

In the long run, the OPR cut should lower MREITs’ finance cost and lift earnings, but the impact to near-term profit (2020-21E) is likely minimal. Most of the MREITs under our coverage (AXRB, IGBREIT, KLCCSS and YTLREIT) have the majority (>70%) of their borrowings pegged at a fixed rate, while the others (PREIT, SREIT) have pegged 43% of their borrowings at a fixed rate.

Lower OPR Should Lift MREIT’s Valuation, Maintain Overweight

On 22nd January 2020, the OPR cut triggered a 12 bps decline in the 10-year MGS yield to 3.17%. We anticipate the compression in MGS yields to drive investors demand for alternative yielding assets such as MREITs, thereby rerating the sector’s valuation. Maintain Overweight. For exposure, we like: (i) KLCC (KLCCSS MK, BUY, TP RM8.90) for its highly defensive earnings / sustainable yield; (ii) Axis REIT (AXRB MK, BUY, TP RM1.97) for its industrial / warehouse portfolio and attractive valuation; and (iii) IGB REIT (IGBREIT MK, BUY, TP RM2.12) for its prime assets, robust earnings track record and strong management. Key risks: weak retail spending, lower economic growth, lower tourist arrivals and reversal in the global yield trend.

Source: Affin Hwang Research - 23 Jan 2020