1H18 realised net income (RNI) of RM152.4m came in within consensus (48%) and our expectation (50%). 1H18 GDPU of 4.62 sen was also within (48%). We make no changes to FY18-19E CNP of RM304-312m. Going forward, we expect low-to-mid single-digit reversions. Maintain UNDERPERFORM and TP of RM1.45.

1H18 realised net income (RNI) of RM152.4m came in well within consensus (48%) and our expectation (50%). 2Q18 GDPU of 2.14 sen was declared, which included a 0.02 sen non-taxable portion, bringing 1H18 GDPU to 4.62 sen which was also within our FY18E target (48%) of 9.69 sen, implying 5.8% gross yield.

Results Highlights. YoY-Ytd, 2Q18 top-line was up marginally by 1.4% on higher rental income. NPI margin was up by 2.5ppt on lower property operating expenses while slightly lower financing cost (-4.9%), allowed RNI to increase by 6.5%. QoQ, top-line was down by 6.4% on higher rental income last quarter likely due to higher turnover rent, and as 2Q is also generally a weaker quarter. This coupled with marginally higher operating expenses caused NPI margin to decline by 5.4ppt. All in, RNI declined by 14.7%.

Outlook. We expect minimal capex of RM15-25m on minor refurbishments and upkeep of both malls. FY18 will see 37% and 18% of MV and TGM’s NLAs up for expiry, while FY19 will see 23% and 44% of MV and TGM’s NLAs up for expiry, respectively. We do not expect any acquisitions in the near-term. Southkey Mall in Johor is slated for completion in 2H18, but we expect the acquisition to only post one reversion cycle, likely by FY21.

Maintain FY18-19E CNP of RM304-312m. We anticipate low-to-mid single-digit reversion for both assets for FY18-19. Our FY18-19E GDPU of 9.7-9.9 sen (NDPU of 8.7-8.9 sen), suggest gross yields of 5.8-5.9% (net yields of 5.2-5.3%).

Maintain UNDERPERFORM and TP of RM1.45. We maintain our TP based on FY18E GDPS/NDPS of 9.7 sen/8.7 sen, and on an unchanged +2.4 ppt spread to our 10-year MGS yield target of 4.20%. Our applied spread is +0.5SD above historical average to serve as a buffer for near-term fluctuations to the MGS on oversupply issues and interest rate hikes, but we may look to remove this going forward once confidence returns to MREITs’ valuations. We maintain our UNDERPERFORM rating. Our TP implies 6.7% yield, which is close to target MREIT peers’ average of 6.6%. Although we believe its fundamentals are intact due to minimal downside risk from prime asset positioning and asset stability (i.e. strong occupancy of >99% on positive reversions), we are comfortable with our call. This is because we remain cautious on valuations for now and are also of the view that most positive upsides have already been priced in.

Risks to our call include bond yield expansions or compressions and weaker-than-expected rental reversions.

Source: Kenanga Research - 16 Jul 2018