9MFY20 realised net income (RNI) of RM164.7m came in within our (70%) and consensus (73%) expectations. 9MFY20 GDPU of 4.67 sen is below (63%) expectation as we had expected higher payout in 2HFY20. However, given the resurgence of Covid-19 cases since 20 September, we lower our FY20-21 CNP by 8-3% on expectations of weaker footfall traffic. Maintain MP but lower TP to RM1.60 (from RM1.80) at +2SD to the 10-year MGS target of 2.80%.

9MFY20 realised net income (RNI) of RM164.7m came in within our and consensus expectations, at 70% and 73%, respectively. 3QFY20 GDPU of 2.11 sen was declared, which included a 0.02 sen non- taxable portion, bringing 9MFY20 dividends to 4.67 sen which is below our FY20E target as we had initially expected a stronger payout in 2HFY20 post the weakness in 1HFY20 (63%) of 7.34 sen, implying 4.4% gross yield.

Results’ highlight. YoY-Ytd, top-line was down by 23% arising from the MCO in 2QFY20 which resulted in some non-essential tenants receiving rental support on a case-by-case basis. As a result, RNI was down by 32% due to the weaker top-line. QoQ, top-line was up by 111% rebounding from a weak 2QFY20 post the MCO. RNI margin normalised to 59% (from 32%) as RNI increased by 294%. Gearing remains healthy at 0.23x.

Outlook. The Covid-19 situation remains challenging for shopper footfall and essentially tenant recovery. The increasing number of Covid-19 cases arising from the emergence of new clusters since 20 September has impacted the footfall and vehicle traffic volume to the retail malls which may result in weaker earnings in 4QFY20. 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 lower FY20-21E CNP by 8-3% to RM216-288m to be conservative on expectations of weaker earnings in 4QFY20 in light of the recent spike in Covid-19 cases. Our FY20-21E GDPU of 6.32-8.14 sen (NDPU of 5.69-7.33 sen) suggest gross yield of 3.8-4.9% (net yield of 3.4- 4.4%).

Maintain MARKET PERFORM on a lower TP to RM1.60 (from RM1.80). Our TP is based on a lower FY21E GDPS/NDPS of 8.14 sen/7.33 sen (from 9.12 sen/8.20 sen) and on an unchanged +2.3ppt spread to our 10-year MGS yield target of 2.80%. Our applied spread is at +2.0SD, on par with other MREITs under our coverage to account for earnings risk given the fluidity of the Covid-19 situation. We continue to monitor the situation closely but remain conservative on earnings and valuations for now.

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

Source: Kenanga Research - 27 Oct 2020