FY20 realised net income (RNI) of RM236.8m came in above our (109%) and consensus (110%) expectations as we had expected a weak 4QFY20 results due to the spike in Covid- 19 cases. FY20 GDPU of 6.75 sen is above our estimate (107%). Near-term outlook remains uncertain given the resurgence of Covid-19 cases which has escalated and we may look to cut earnings if stricter lockdowns are imposed. Maintain MP and TP of RM1.60 at +1.5SD to the 10-year MGS target of 3.1%.

FY20 realised net income (RNI) of RM236.8m came in above our and consensus expectations, at 109% and 110%, respectively, as we were conservative in our 4QFY20 earnings outlook in light of the spike in Covid-19 cases. 4QFY20 GDPU of 2.08 sen was declared, which included a 0.02 sen non-taxable portion, bringing FY20 dividend to 6.75 sen which is also above our estimate at 107%, implying 4.1% gross yield.

Results’ highlight. YoY-Ytd, top-line was down by 16% as a result of the MCO in 2QFY20 which resulted in some non-essential tenants receiving rental support on a case-by-case basis. All in, RNI was down by 25%, and GDPU was down by 26%. QoQ, RNI was down by 6.2% as the positive top-line of 12.8% was offset by higher allowances for impairment of trade receivables. Gearing remains stable at low level of 0.23x.

Outlook. The impact of MCO 2.0 will continue to put a strain on retail MREITs as it threatens shoppers’ footfall, car traffic volume and could result in higher temporary closure of retail shops. That said, we believe FY21 will be better than FY20 as the lockdowns have been less strict with more shops allowed to operate compared to the MCO in CY20. 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 FY22-23.

Maintain FY21E CNP of RM288m and introduce FY22E CNP of RM293m on low single-digit positive reversions and minimal expiries. Our FY21-22E GDPU of 8.14-8.25 sen (NDPU of 7.33-7.43 sen) suggest gross yield of 5.0-5.0% (net yield of 4.5-4.5%).

Maintain MARKET PERFORM and TP of RM1.60. Our TP is based on FY21E GDPS/NDPS of 8.14 sen/7.33 sen and on an unchanged +2.3ppt spread to our 10-year MGS yield target of 3.10%. Our applied spread is at +1.5SD, on par with other MREITs under our coverage to account for earnings risk given the fluidity of the Covid-19 situation. We will continue to monitor the situation closely but opt to remain conservative on earnings and valuation outlook for now.

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

Source: Kenanga Research - 26 Jan 2021