Kenanga Research & Investment
MREITs - Upsides Capped By Current Bond Situation
Maintain NEUTRAL. MREITs’ fundamental outlook remains unexciting, on stable but uninspiring reversion rates due to the oversupply of retail, office and hospitality spaces. However, we favour the industrial segment for its sturdier earnings stability (similar reversions to other segments on longer-term leases). All in, we expect modest DPU growth of 3%/1% YoY in FY19/FY20. We maintain our 10-year MGS target at 3.40% for now, given the US Fed’s outlook to maintain interest rates in 2020, while other events such as FTSE Russell’s decision to exclude Malaysia in the World Government Bond Index (WGBI) would be seen as a negative to MGS yields, but this could be offset by a potential interest rate cut in the near term. We maintain all our TPs and Calls for MREITS under our coverage, but upgrade IGBREIT to OP (from MP) on attractive valuations. Maintain NEUTRAL as we have accounted for most foreseeable upsides while MREITs under our coverage are offering decent average gross yields of 5.7%, in our view. Favouring the industrial segment, our preferred top pick is AXREIT (offering FY20 yield of 5.4%) but we also have IGBREIT (FY20 yield of 5.1%) for its stable asset profile and CMMT on attractive yield of 6.7%.
Results continue to meet expectations. All MREITs’ results met expectations which were similar to the previous quarter. QoQ, top-line and bottom-line both saw average growth of 2% for MREITs under our coverage, with all stocks seeing flattish to single-digit CNP gains except for CMMT (-4%). YoY-Ytd, top-line growth was mostly positive (+3%), save for CMMT (-2.5%) and MQREIT (-8.0%) on lower rental contributions. As a result, bottom-line was down by 1.5% for all MREITs under coverage, weighed down by CMMT (-19.9%) and MQREIT (-14.9%). As a result, we made no changes to earnings estimates, TPs and calls during the results season.
Results continue to meet expectations. All MREITs’ results met expectations which were similar to the previous quarter. QoQ, top-line and bottom-line both saw average growth of 2% for MREITs under our coverage, with all stocks seeing flattish to single-digit CNP gains except for CMMT (-4%). YoY-Ytd, top-line growth was mostly positive (+3%), save for CMMT (-2.5%) and MQREIT (-8.0%) on lower rental contributions. As a result, bottom-line was down by 1.5% for all MREITs under coverage, weighed down by CMMT (-19.9%) and MQREIT (-14.9%). As a result, we made no changes to earnings estimates, TPs and calls during the results season.
MREITs under coverage up 4% YTD on average, in tandem with the KLREI Index (+4%) based on our report cut-off date on 20th December 2019. Most MREITs saw positive YTD gains YTD ranging from 1-12% save for MQREIT (-8%). AXREIT was the top gainer YTD (+12%) and was also a preferred pick as we upgraded it to an OUTPERFORM call in our previous strategy report (dated 3rd October 2019) given its earnings stability and being one of the few Shariah-compliant MREITs. Top decliner YTD was MQREIT on rental pressures which caused its bottom-line to decline YoY. Other MREITs registered YTD gains as their results continued to meet expectations along with decent yields.
Source: Kenanga Research - 6 Jan 2020
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