FY20 realised net income (RNI) of RM116.7m came in above our and consensus expectations at 118% and 106%, respectively, on better-than-expected top-line in 4QFY20 due to the traditionally active shopping season. FY20 dividend is also above (116%). However, we lower FY21E CNP by 22% to RM177m as the retail segment remains highly susceptible to the worsening pandemic on potential rental waivers and negative reversions. Downgrade to UNDERPERFORM (from MP) on a lower TP of RM1.15 (from RM1.40).

FY20 realised net income (RNI) of RM116.7m came in above our and consensus expectation at 118% and 106%, respectively, on stronger- than-expected 4QFY20 results on improved shopper traffic momentum and tenants’ sales during the holiday season. 2HFY20 dividend of 2.52 sen (which includes a non-taxable portion of 0.08 sen) brought FY20 dividend to 4.13 sen which also came above our expectation of 3.5 sen (116%), implying 3.0% gross yield.

Results’ highlights. YoY, top-line was down by 23% on weakness from all assets due to rental rebates given to non-essential tenants during the MCO phases. This directly impacted RNI which declined by 53% despite lower financing cost (-11%) and expenditure (-13%). QoQ, top-line improved by 13% after rebounding from rental waivers in 2QFY20 and 3QFY20, as 4QFY20 saw strong sales momentum from increased shopper traffic during the holiday season. All in, RNI was up by 25% on better RNI margin of 31% (vs. 12% in 2QFY20 and 28% in 3QFY20), but still below pre-Covid-19 level of c.40%. Gearing remains stable at 0.35x.

Outlook. FY21 will see up to 20% of portfolio NLA expiring. We expect conditions in most malls to remain challenging in the near term given the on-going pandemic, but we do expect to see improvements in 2HFY21 assuming a smooth vaccine roll-outs. For now, we do not discount the possibility of further rental rebates if the coming months prove challenging for tenants as we believe management will prioritise occupancy over reversions.

Lower FY21E CNP by 22% to RM177m as we anticipate further weakness from potential rental waivers and on single-digit negative rental reversions (from flattish reversions) for leases up for renewal. We introduce FY22E CNP of RM200m on positive low single-digit reversions and the absence of possible rental rebates on assumptions that the Covid-19 situation would be resolved by then. Our FY21-22E GDPU of 6.1-6.9 sen (NDPU of 5.5-6.2 sen) imply gross yield of 4.5- 5.0% (net yield of 4.0-4.5%).

Downgrade to UNDERPERFORM (from MARKET PERFORM) on a lower TP to RM1.15 (from RM1.40). Our TP is based on a lower FY21E GDPS/NDPS of 6.1 sen/ 5.5 sen (from 7.8 sen/ 7.0 sen) and +2.3ppt (at +1.5SD) to our 10-year MGS target yield of 3.1%. Given the worsening Covid-19 situation thus far which directly affects shopper traffic and thus tenant stability, we opt to be cautious on pure retail MREITs as earnings remain particularly vulnerable. As such, we are comfortable with our conservative earnings estimates and valuations and will continue to monitor the fluidity of the pandemic as it progresses.

Source: Kenanga Research - 29 Jan 2021