• KIP REIT’s portfolio consists of seven properties with a differentiated market positioning as a neighbourhood shopping mall that caters predominantly to lower and middle-income consumers

• While FY22-24E DPU yields appear compelling at 7.2-7.4%, this is likely due to its unexciting growth prospects. Moreover, there is downside risk should its proposed share-placement exercise materialise

• Initiate With a HOLD Rating and TP of RM0.94

Initiating With a HOLD Rating and Target Price of RM0.94

We initiate our coverage on KIP REIT (KIPREIT) with a HOLD rating and 10-year Dividend Discount Model (DDM) derived 12-month target price of RM0.94 based on a cost of equity of 9.1%. %. We recommend a HOLD call as we anticipate that rising interest rates and global bond yields will affect investors’ appetite for REITs, while higher inflation may dampen consumer spending and affect the retail REITs’ rental reversion during this recovery period. Recently, the US Federal Reserve raised the target for the Fed funds rate by half a point to 0.75-1% during its May meeting, the biggest rise since 2000. Bank Negara subsequently raised its policy rate by 25bps.

Assets With a Differentiated Market Positioning

We are of the view that KIP REIT’s business positioning and strategically located retail assets in suburban areas will continue to sustain the group’s dividend level in the future. KIP REIT’s portfolio consists of seven properties with a differentiated positioning as neighbourhood shopping malls that cater predominantly to lower and middle-income consumers. These properties are strategically located near highdensity residential areas with residents within the company’s income target bracket Furthermore, the locations of these assets are accessible and highly visible from the main thoroughfare of their respective towns.

Cautious on Its Placement Exercise

KIP REIT is targeting a private placement to the tune of RM80m which is earmarked for future asset acquisitions. The targeted completion for the placement is August 2022. However, we have a negative bias towards the placement as we foresee EPU dilution from the exercise. Furthermore, based on our check, there are no hard candidates in the acquisition pipeline, hence we cannot gauge further the viability of potential assets. Upside risk: a stronger-than-expected retail recovery, which would translate to higher-than-expected rental reversion for the company’s tenants. Downside risk: a drop in the occupancy rate due to renewal risk.

Source: Affin Hwang Research - 20 May 2022