FY20 realised net income (RNI) of RM228.4m came in below our (90%) and consensus (88%) on a weaker-than-expected 4QFY20 due to rental rebates. FY20 dividends of 7.33 sen came in within, at 95% of our expectation. Going forward, we expect flattish-to-mildly negative reversions with the possibility of rental rebates for retail tenants, and weaker contributions from the hospitality segment due to Covid-19. As such, we lower FY21E CNP by 14% to RM271m, and introduce FY22E CNP of RM297m. Maintain MARKET PERFORM with a lower TP of RM1.45 (from RM1.50).

FY20 realised net income (RNI) of RM228.4m came in below our estimate at 90% and consensus’ at 88% due to weaker than expected earnings in 4Q20 due to higher than expected rental rebates and weak contributions from the hotel segment. Final dividend of 2.38 sen (which includes a 0.43 sen non-taxable portion), bringing FY20 dividend to 7.33 sen which came in within at 95% of our estimate of 7.7 sen as we expected a lower payout ratio of 90% in FY20 vs. its actual payout of 94.5%

Results’ highlight. YoY-Ytd, top-line was down by 9% on lower revenue from: (i) retail (-14.5%) on rental support to assist tenants as well as lower carpark income affected by restrictions and loss of business during the MCO, CMCO and RMCO, and (ii) hotel segment (-12.8%) due to travel restrictions and absence of corporate events during the period. This was partially offset by positive performance from the office segment (+8.5%), services segment (92%) and industrial and other segments (4.8%). All in, CNP was down by 19.3%. QoQ, top-line was down by a hefty 37.5% due to a steep decline from the retail (-45%) and hospitality (-54%) segments due to the reasons mentioned above, while the office segment was down marginally by 3%, while the services and industrial segments were rather flattish. As a result, RNI was down by 63.9% despite marginally lower financing cost (-8.3%) and expenditure (-10.8%).

Outlook. FY21 will see 11% of NLA up for renewal on the back of expectations of flattish-to-mildly negative reversions for retail, and flattish reversions for offices assets, and potential rental rebates or deferments for some retail tenants on a case-to-case basis and the severity of the Covid-19 situation on tenant’s sales. Barring any unforeseen circumstances, we expect this quarter to be the weakest and expect gradual improvements going forward. The group remains cautious on the potential impact of the coronavirus outbreak on the performance of the hotel and retail segments which have taken the hardest hit.

Lower FY21E CNP by 14% to RM271m on expectations of lower contributions from the hotel segment on weaker occupancy rates of 30- 40% (vs. 50-60%) and fewer events, as well as flattish-to-marginally declining reversions for the retail segment (vs. low single-digit reversions previously). We also introduce FY22E CNP of RM297m on expectations of positive reversions and better occupancy of 60% for the hospitality segment. FY21-22E NDPU of 6.8-7.5 sen provides 4.5-5.0% net yield.

Maintain MARKET PERFORM but lower TP to RM1.45 (from RM1.50).  Our TP is based on a lower FY21E GDPS/NDPS of 7.6/6.8 sen (from 8.8/7.9 sen) and a +2.5ppt spread on a lower 10-year MGS target of 2.80% (from 3.30%). Our applied spread is at +2.0SD, on par with other MREITs under coverage (save for AXREIT) to account for earnings risk in light of the Covid-19 pandemic, considering its exposure to the retail and hospitality segments. We are comfortable with our MARKET PERFORM rating as we believe most near-term downsides have been accounted for.

Source: Kenanga Research - 4 Aug 2020