Maintain NEUTRAL. CY20 will remain challenging on expected weak 2QCY20 results due to the MCO. Hardest hit segments in 1QCY20 were the retail and hospitality assets due to closures of business operations, Offices assets remained fairly stable as tenants had the work-from-home option, and we expect this segment to remain steady in the near term, while the industrial segment is the most resilient, chalking up strong orders during the pandemic. Furthermore, industrial player AXREIT has no force majeure clause in place ensuring earnings stability unlike other REITs that are considering rental rebates and waivers on a case-by-case basis. As such, AXREIT was the top gainer up 17% YTD and KLCC up 2% on its stable asset profile while other MREITs mostly declined on potential earnings weakness. We make no further changes to earnings as we believe we have priced in most foreseeable risk for now, but we believe the sector is not out of the woods just yet with uncertainty looming from a possible relapse in Covid-19 cases, causing a prolonged weak footfall traffic in MREITs’ assets which would impact valuations. As such, we maintain our +2SD spread to our 10-year MGS target of 3.30% as we are tepid on the recovery to the new normal, while AXREIT commands +1SD to the 10- year for its stable earnings profile. All in, MREITs are commanding 5.8% gross yield on average, which we deem as decent, while MQREIT (MP; TP:RM0.700) is commanding 9% due to steep decline YTD of 26% but we anticipate further downside to share price on weaker quarters ahead.

Results within, but retail assets struggled. All MREITs’ results met our expectations similar to 4QFY19, but post management updates, we believe there may be further weakness for CMMT and PAVREIT on lower-than-expected occupancy and higher-than-expected operating cost arising from Covid-19 expenses and fixed cost. Due to the rental rebates, CMMT (-15% YoY), IGBREIT (-12% YoY), and PAVREIT (-23% YoY) saw the steepest top line declines while other MREITs were flattish YoY, but we anticipate some earnings weakness in the upcoming 2QCY20 from rental rebates, except for AXREIT which has no force majeure clause for tenants thus ensuring earnings stability. As such, we trimmed CMMT and PAVREIT’s earnings by a further 31-15% and 23-3%, respectively, for FY20-21E. All in, post results, we lowered PAVREIT’s TP to RM1.50 whilst maintaining our MP call, and lowered CMMT’s TP and call to UP.

AXREIT the top gainer YTD up 17%, on stable earnings given its industrial profile which fared better during the Covid-19 pandemic compared to other REITs segments (i.e. retail, hospitality and office assets). Office REIT KLCC saw the second highest YTD gain of 1.5% as KLCC’s office assets were also fairly stable during the first three months of MCO as most tenants stayed put. However, the retail and hospitality segment were the most affected as tenants were not allowed to operate during the MCO period causing top-line to decline by 12-23% YoY (save for SUNREIT which saw +0.4% top-line growth due to new acquisitions). MQREIT was the worst decliner YTD (-26%) despite its top-line up 0.7% YoY on anticipation of weaker quarters ahead due to rental rebates.

Source: Kenanga Research - 9 Jul 2020