· A diversified portfolio, predominantly retail (est. 51.4% of GRI). Al-Salam REIT (ALSREIT) holds a well-diversified portfolio consisting of retail, followed by QSR properties (restaurants and industrial premises) which are on TNL (Triple Net Lease) (24.9% of GRI), offices (11.7%), a hypermart (8.8%) and a college (3.2%) which segmentally diversifies various asset risks. We like the fact that the main revenue driver is the retail segment (51% of FY16E GRI) which delivers strong earnings growth (compared to office and industrial REITs) due to its competitive nature and shorter term leases, while stable earnings is derived from QSR properties (25% of FY16E projected GRI) and KFCHC (3.2% of FY16E GRI) from long-term leases of 9 to 15 years and a rental formula which does not allow for negative reversions.

 · Strategically located assets to capture strong footfall and capitalise on the weaker Ringgit. Komtar JBCC shopping mall, Menara Komtar office tower, Mart@Kempas and KFCH College is located within the prime areas of Flagship Zone A in Iskandar Malaysia. These are established neighbourhoods with existing population mass and coupled with the weaker Ringgit, population should be on an uptrend. While Komtar JBCC yields higher-than-average occupancy rates of 89% vs. Johor Bahru’s average of 77%, we note that the latter’s average is largely brought down by very old retail spaces that is no longer conducive for prime retail activities. Additionally, QSR Properties are well spread out across established commercial and residential areas in Malaysia in mature neighbourhoods in Penang, Johor and Klang Valley.

· Projected earnings of RM10.5m-RM37.2m in 9MFPE15-FY16E based on GRI of RM24.9m-RM72.6m in FY15-16E (182%-291% YoY) (from prospectus). This assumes 194% NPI growth in FY16 with Komtar JBCC as the main growth driver (+252% YoY in GRI) which is better than its peer’s growth rates average of 7%. Based on the projected payout ratio of 99.9%, we estimate FY16E gross yields of 6.41% vs. small-mid cap peers (<RM1b mkt cap) average 8.0% vs. big cap (>RM1b mkt cap) peers average of 6.0%, which we deem as fair.

· Deep value in Komtar JBCC. As the main revenue driver, we believe Komtar is bound to be a game changer for ALSREIT over the next 2-3years as: (i) it is a new mall (<1year) and occupancy is already at 89% to date, (92% by end-CY15), (ii) able to capitalise on a depreciating Ringgit as Komtar JBCC is located walking distance from CIQ and, <10mins from JB-Singapore Causeway, (iii) rental at a low base (RM5.63 psf/month) vs. its next door peer JB City Square mall (RM19- 20psf/month), (iv) strong tenant mix with high GRI contributions from the Fashion segment (41%) which generally delivers high rental income. This implies strong rental growth in FY17 when 43% of NLA is up for expiry. Current FY16E ARR projections are at RM8.40psf/month and if we assume 18% reversions in FY17, we expect earnings of RM42.4 which translates to 7.3% gross yields assuming 99.9% payout.

· Strong pipeline for acquisitions from sponsor, JCORP. ALSREIT is eyeing RM770m worth of assets from its prominent sponsor JCORP such as: (i) Menara JCorp (RM100m), (ii) Menara 238 (RM230m), (iii) Menara VSQ (RN140m), (iv) Galleria at Kotaraya (RM150m), and (v) other QSR properties (RM150m), as well as other 3rd party assets, which could materialise as soon as late FY15 to early FY16. ALSREIT current gearing is at 0.38x, implying that they could borrow up to RM42m before hitting the internal gearing limit of 0.40x. Thus, the company may have to consider cash-calls to fund assets acquisitions from its sponsor, JCORP.

· Fair Value of RM1.05 based on a target yield of 6.2%. Our target yield is based on a +2.20ppt spread to our 10-yr MGS target of 3.90%. The spread is based on a 58bps premium to our large cap MREITs average spread of 1.62ppt under our coverage (save for CMMT), to account for ALSRIET’s smaller market cap of RM580m, and higher gearing of 0.38x vs. 0.15x-0.35x. However, we believe ALSREIT deserves a thinner spread vs. small cap MREITs (between +3.2ppt to +6.0ppt) due to its asset stability and catalysts arising from strong acquisition potentials from its parent. While our TP offers 10.9% total returns, investors may find better entry points when the bond yields stabilize post the US rate hikes. NOT RATED. ALSREIT is targeted for IPO listing on 29th September 2015, while book closing period is from 4th September – 15th September 2015, before 5.00 p.m.

Source: Kenanga Research - 15 Sep 2015