Downgrade MREITs to UNDERWEIGHT from NEUTRAL. We have already accounted for earnings risk arising from potential GST impact on consumer spending. However, Malaysian Government Securities (MGS) saw sharp yield expansions in Dec-14 to 4.2% (from 3.9% in Nov) as foreigners started selling Malaysian bonds, post the free fall in oil prices and weakening MYR. 2H15 may also be threatened by the US Federal Reserve potential interest rate hike. So it may be a very volatile bond market in 2015 considering that foreign shareholding is at a high of 47%, implying that MREIT valuations are at risk, not to mention potential yield spread expansions if bond yields continue to expand. We think that early 1Q15 could see some rebound rallies but we advise investors to sell MREITs on strength and bottom fishing towards end 2Q15 to early 3Q15 to reposition for a better 4Q15 as the oil crisis and the 10-yr MGS would have preferably stabilised while retail spending would have picked up post GST and should be seasonally better. We have downgraded all our TP’s by 6.0%-7.4% based on a higher 10-yr MGS target of 4.2% (from 3.8%). Our Calls and TP’s are KLCC (UP; TP: RM6.39), SUNREIT (OP; TP: RM1.57), CMMT (OP; TP: RM1.47), IGBREIT (MP; TP: RM1.26), PAVREIT (UP; TP: RM1.31), and AXREIT (UP; TP: RM3.27). Our top pick is SUNREIT as earnings boosters from Sunway Putra Place (SPP) will offset potential unexpected earnings risks arising from slower consumer spending while its yield spreads are much thicker than other MREITs under our coverage which offers some valuation buffers in a volatile market.

3Q14 results review. MREITs’ 3Q14 results were within expectations except for AXREIT which came in below our, and consensus, expectations, due to lower occupancy rates and softer-thanexpected rental reversions. QoQ retail REITs’ GRI was flattish to slightly positive (0%-4%) on minimal rental reversions, while office/industrial based AXREIT was the weakest (-5%) due to the weakening office segment. RNI was positive for most retail REITs (3%-13%), but CMMT’s (-3%) and AXREIT’s (-9%) negative growth was due to higher financing cost and operating expense. YoY, RNI growth was strong for most MREITs (10%-20%), save for AXREIT (-2%) which cascaded from a weak topline, and CMMT’s weak bottomline (1%) due to higher operating cost. RNI was strong for SUNREIT (15%) and IGBREIT (15%) from double digit rental reversion in CY13, while KLCC’s growth (20%) was due to the new stapled REIT structure in 2Q13.

Source: Kenanga