KIP REIT is a retail REIT, but operates in a resilient market segment that targets daily staple goods for the low-to-mid income consumers. As such, we expect stable earnings on unexciting reversions. It’s low gearing of 0.14x is a catalyst for inorganic growth (c. 9% to earnings). We believe KIP REIT is a good value proposition, trading below NAV and IPO price, and commanding 7.4% yield (19% total returns). A Trading Buy with FV of RM1.05.

Minimal downside risk in a resilient market segment. KIP REIT is a retail REIT focusing on the sub-urban market (lower-to-middle income group), while its assets are mostly located in smaller towns, close to major residential catchments. We like the fact that it caters mostly to supermarkets carrying daily staple food products and fresh produce, while other segments include: (i) fashion apparel, (ii) household and gift stores, (iii) IT and electrical stores, and (iv) F&B, making demand fairly inelastic as shopper traffic is expected to be resilient, and tenants less susceptible to economic fluctuations (refer overleaf).

Stable earnings on unexciting reversions. FY17 saw modest reversions of c.3%, while we expect 0-2% reversions in FY18-19E. Occupancy remains between 90-94% for most assets, save for KiP Mart Lavender, Senawang (78%), KiP Mart Melaka (75%) and KiP Mall Bangi (78%), which offers upside potential as the Group is confident of securing more tenants at KiP Mall Bangi in the near term. KIPREIT will see a fair portion of lease expiries in FY18-19, of 45- 32% of NLA, but we believe renewals will not be an issue as reversion rates are not aggressive, while shopper demand is expected to be resilient on constant demand for daily necessities.

Able to gear up to RM200m for future acquisitions. KIP REIT is bullish on acquisitions with a string of assets under Right of First Refusal (ROFR) such as KiP Mall Kota Warisan, KiP Mart Sg. Buloh, KiP Mart Kuantan, KiP Mart Sendayan, KiP Mart Sg. Petani while the Group is also looking at 3rd party retail assets located in the suburban areas. Assuming KIP REIT utilizes RM200m for acquisitions (before hitting its internal gearing limit of 0.35x), with a 6.5% cap rate (portfolio cap rates between 6.3-6.5%), and fully funded by borrowings, we estimate earnings could be increased by 9% p.a. Good entry point as share price is below IPO levels, with 7.4% yield. We believe current levels are a good entry point with KIPREIT currently trading below NAV/unit and IPO price of RM1.00. Additionally, as per the IPO, KIP REIT has committed to pay out 100% distribution till FY18, while we are assuming 98% in FY19, implying FY18-19E dividends of 6.9 -7.0 sen (7.4-7.5% yield) which is decent vs. most small cap MREITs’ yields (5.8-6.9%) and large cap (5.2-6.5%). Positively, dividends will be paid on a quarterly basis going forward (vs. semi-annually previously).

Trading Buy, RM1.05 Fair value. We have pegged a conservative +2.7ppt spread for KIPREIT which is above our applied spreads for large cap retail MREITs (+0.8 to +1.3ppt) and office/industrials MREITs (+1.7 to +2.0ppt). Going forward, we believe KIPREIT’s spread could narrow to the lower end of small cap MREITs’ spread (which trade between +1.8ppt to +2.9ppt) if it shows earnings stability in coming quarters, providing further share price upsides. However, even on conservative valuations to our 10-year MGS target of 4.00%, total returns are attractive at 19%.

Source: Kenanga Research - 10 Aug 2017