1QFP21 realised net income (RNI) of RM29.4m came in below our and consensus expectations at 11% each on weaker-than- expected retail and hospitality segments. Dividend of 0.9 sen also came below at 12%. Going forward, we expect mildly negative reversions and rental rebates for retail, and weaker contributions from the hospitality segment’s tenants in the near term due to Covid-19. As such, we lower FP21E CNP by 5% to RM258m, and FY22E CNP by 9%. Downgrade to UNDERPERFORM with a lower TP of RM1.10 (from RM1.45).

1QFP21 realised net income (RNI) of RM29.4m came in below our and consensus’ estimate at 11% each due to higher than expected rental rebates and weak contributions from the hotel segment. An advanced dividend of 0.90 sen (which includes a 0.30 sen non-taxable portion), which came in below at 12% of our estimate of 7.6 sen for FY21E.

Results’ highlight. YoY, top-line was down by 30.8% on a weaker; (i) retail (-26.3%) and, (ii) hospitality (-88.2%) segments, but the office (+3.4%) and services (+2.8%) segments remained positive. All in, RNI was down by 60% on the back of higher operating cost (+8.5%). QoQ, topline bounced back up by 22% due to improvements from the retail segment (+44%) as there were lesser rental assistance during the quarter, offices and services segment remained flattish while hospitality was down by 60% due to challenging market conditions. As a result, RNI was up by 34%.

Outlook. We remain cautious for FP21E especially in the near term (1Q and 2Q) due to the MCO. The office segment has been stable so far but retail and hospitality segment remain vulnerable to challenges arising from Covid-19 and the various MCO’s. Retail saw some recovery in 1QFP21 ( close to 70-80% of pre-Covid-19 levels) but the recent MCO in October has worsened the situation, and as such we expect weaker 2QFP21 with the Group continuing to support tenants through rebates and rental assistance. The hotel segment remains weak and the Group is working hard to attract domestic travellers. Office remains stable for now, while the industrial remains resilient given the growing IPI of 1% YoY.

Lower FP21E CNP by 5% to RM258m on mildly negative reversions (from flattish reversions), and increased rebates in the near term (1Q and 2Q), but we expect the situation to improve gradually post 3QFY21 on expectations of the Covid-19 situation improving. We also lower occupancy for hospitality segment to 30% (from 40%), and lower ARR’s (- 15%). However, the office and industrial segments are expected to remain stable for now. Our lower CNP is post updating FP21E to an 18-month period (from 12 months previously, as the Group recently changed its financial year end to December from June). As such FY22 is also lowered by 9% on lower rental rates post the weaker FP21E. FP21E / FY22E NDPU of 6.4-6.8 sen provides 4.2-4.4% net yield.

Downgrade to UNDERPERFORM from (MP) on a lower TP of RM1.10 (from RM1.45). Our TP is based on CY21E GDPS/NDPS of 5.8sen / 5.2 sen (from FY21E GDPS/NDPS of 7.6 sen / 6.8 sen) and an unchanged +2.5ppt spread on a lower 10-year MGS target of 2.80%. Our applied spread is at +2.0SD, on par with pure retail MREITs under our coverage to account for earnings risk in light of the Covid-19 pandemic, considering its exposure to the retail and weak hospitality segments.

Risks to our call include: (i) bond yield compression, and (ii) stronger- than-expected earnings in retail, hospitality and office divisions.

Source: Kenanga Research - 24 Nov 2020