1HFY20 realised net income (RNI) of RM87.9m came in broadly within our (37%) and consensus (35%) estimates on expectations that 2QFY20 will be one of its weakest quarters yet due to the pandemic-led lock-downs and rental rebates for tenants, and earnings should improve gradually in 2HFY20. 2QFY20 GDPU of 0.62 sen is also broadly within (35%). Maintain FY20-21E CNP of RM235-299m. Maintain MP and TP of RM1.65 at +2SD to the 10-year MGS target of 3.30%.

1HFY20 realised net income (RNI) of RM87.9m came in broadly within our, and consensus, expectation, at 37% and 35%, respectively, as we expect the 2QFY20 to be its weakest quarter in light of the MCOs which provided tenants with rental support. 2QFY20 GDPU of 0.62 sen was declared, which included a 0.03 sen non-taxable portion, bringing 1HFY20 dividends to 2.56 sen which is also broadly within our FY20E target (35%) of 7.37 sen, implying 4.1% gross yield.

Results’ highlight. YoY, top-line was down by 32% arising from the pandemic-induced lockdowns which resulted in tenants getting rental support on a case-by-case basis. All in, RNI was down by 45% on declining RNI margins (-11.2ppt) due to the weaker top-line. QoQ, top line was down by 50% due to similar reasons mentioned above. As a result, RNI was down by 72% primarily due to top-line weakness.

Outlook. The Covid-19 situation remains challenging for shopper footfalls and essentially, tenant recovery. For now, subsequent quarters are expected to see improvements vs. 2QFY20 as the situation has eased slightly since the RMCO on 10th June 2020. We do not expect the acquisition of Southkey Mall in Johor in the near term and reckon that it would take at least one reversion cycle or longer in light of the Covid-19 pandemic for the asset to stabilise before being acquired by IGBREIT, likely by FY22.

We maintain FY20-21E CNP of RM235-299m. We made no changes to earnings for now but will continue to monitor the situation as things slowly revert to the new normal. Our FY20-21E GDPU of 7.37-9.12 sen (NDPU of 6.63-8.20 sen) suggest gross yield of 4.1-5.1% (net yield of 3.7-4.5%).

Maintain MARKET PERFORM on an unchanged TP of RM1.65. Our TP is based on FY21E GDPS/NDPS of 9.12 sen/8.20 sen and on an unchanged +2.3ppt spread to our 10-year MGS yield target of 3.30%.

Our applied spread is at +2.0SD, on par with other MREITs under coverage to account for earnings risk and MGS uncertainty. We will continue to monitor the situation closely but remain conservative on bond pricing for now until the Covid-19 situation is fully resolved.

Risks to our call include: bond yield compressions or expansion, stronger or weaker-than-expected rental reversions

Source: Kenanga Research - 21 Jul 2020