• The Malaysian government has extended the Movement Control Order (MCO 2.0) on all states except Sarawak due to the high number of Covid-19 cases reported
• Though a setback to earnings recovery in 2021, we turn more positive on 2022 earnings and expect them to return to 2019 levels due to easement of SOPs following availability and distribution of Covid-19 vaccines
• In view of the valuation pullback, we upgrade MREITs to OVERWEIGHT. We also upgrade KLCCSS and PREIT to BUY due to share-price weakness. Our sector top picks are KLCCSS and IGBREIT.

Reimplementation of MCO / CMCO and RMCO

The government of Malaysia has recently extended the Movement Control Order (MCO 2.0) to 4 February 2021 to all states in Malaysia except Sarawak, which was put under the Rehabilitation Movement Control Order (RMCO). In our view, the move made by the government, though necessary, will be negative to the sector, in particular, the retail and hotel MREITs.

2021 Retail and Hotel Outlook: Slower Recovery Is Expected

At this juncture, we maintain our view that 2021 would be a year of two halves of which 1H21 should see weakness in the retail segment followed by a stronger recovery in 2H21 following the distribution of Covid-19 vaccines. We expect the quantum of rental assistance extended to tenants to be less extensive for MCO 2.0. As for hotels, we are not upbeat on the earnings outlook in 2021. Hotel occupancy should remain below 40% from the reimplementation of interstate travel restrictions and cross-border travel ban. Further, promotional efforts taken by management to encourage staycations should lead to lower average daily room rates (ADR) while corporate/event bookings should still be subdued due to the strict SOPs for large gatherings, though we do expect to see some pick-up in the segment in 2H21. Elsewhere, the offices, industrials and other asset segments should contribute stable earnings in 2021 as we do not foresee any direct impact to the assets.

A Brighter Outlook for 2022

We turn more positive on 2022 earnings as we expect the availability of Covid-19 vaccines to lead to easement of SOPs, allowance of inter-district and interstate travel as well as allowance for mass gatherings. All this combined should create a conducive environment for retail activities to resume to the pre-Covid 19 level. However, we do believe it would take a little longer for hotel earnings to return to normal as occupancy would depend on the cross-border travel ban to be lifted. Elsewhere, other asset segments should remain resilient.

KLCCS and PREIT Upgraded to BUY

We upgrade KLCCSS and PREIT to BUY (previously HOLD) on valuation following price weakness and as we turn more positive on their 2022 earnings outlooks. We note that stock prices for all MREITs have pulled back after the announcement of the MCO and we think this is a good opportunity to pick up some quality names with compelling yields, especially if we take a longer-term perspective on earnings improvement in 2022.

Upgrading MREITs to OVERWEIGHT

Overall, we upgrade MREITs to OVERWEIGHT on valuation. Given the low MGS yield, we expect the market to re-rate the high-quality MREITs. The 200bps spread against MGS is also the widest in the past 6 years. For sector exposure, we like KLCC (KLCCSS MK, BUY, TP: RM7.88) for its defensive yield and strong balance sheet as well as IGB REIT (IGBREIT MK, BUY, TP: RM1.82) as a recovery play given its healthy earnings growth driven by prime assets and strong management.

MCO for All (except Sarawak) Till 4 February 2021

On 11 January 2021, the government of Malaysia re-implemented a two-week long (from 13 January to 26 January 2021) Movement Control Order (MCO 2.0) in 5 states, namely Pulau Pinang, Selangor, Melaka, Johor and Sabah and 3 Federal Territories, while other states were put under Conditional Movement Control Order (CMCO) and Recovery Movement Control Order (RMCO). However, due to continued spikes in Covid-19 cases and infections within the community, all states except Sarawak have been classified under MCO until 4 February 2021.

Source: Affin Hwang Research - 27 Jan 2021