9MFY21 realised net income (RNI) of RM71.7m came in above our expectation (77%) as we anticipate a significantly weaker quarter due to disruptions from the MCO, but the results met consensus at 63%. As such, we increase FY21E CNP by 18% to RM109m on better reversions and lower rental rebates, while FY22E CNP of RM200.5m remains unchanged. Maintain MARKET PERFORM and TP of RM1.30 as our valuations were already based on a more normalised FY22, and at +0.5ppt spread above the 10-year MGS target as we remain cautiously optimistic on pure retail and the Group’s high lease expiries in FY22.

9MFY21 realised net income (RNI) of RM71.7m came in above our expectation (77%) as we anticipate its 3QFY21 results to be significantly weaker in light of the disruptions from MCO. The results came in broadly within consensus at 63%. No dividends, as expected.

Results’ highlights. YoY-Ytd, top-line was down by 3% on proportionately weaker contributions from all retail assets. This coupled with only a slight decline in operating cost (-1%) caused RNI to decline by 6% to RM71.7m. QoQ, top-line was down by 9% as 3QFY21 was a weaker quarter particularly for retail due to the MCO which resulted in slight declines in occupancy, while lower operating cost (-15%) likely due to lesser rental assistance during the quarter, resulted in RNI declining by only 2%. Gearing remained flat at low level of 0.35x.

Outlook. FY21 will see up to 20% of portfolio NLA expiring. We believe the worst quarters are behind us for now, and expect 4QFY21 to be a stronger quarter as shopper traffic and the economy gradually return to normalcy. FY22 will be a major lease expiry year for the group with up to 53% of NLA up for expiry. We are optimistic that the resumption of economic activity bode well for reversions in FY22 at this juncture, but will continue to monitor the situation more closely as disruptions to economic activity from a pandemic resurgence would be negative for the Group.

Increase FY21E CNP by 18% to RM109.3m, while FY22E CNP of RM200.5m remains unchanged. We upgrade FY21E CNP as we initially expected 2Q and 3Q to be significantly weaker as a result of the MCO and higher rental rebates. However, the Group has weathered the situation better than expected while upcoming quarters are supposed to see better earnings contribution with the reopening of the economy since September 2021. As such, we have increased FY21 reversions to flattish (from mildly negative) and reduced contributions to rental assistance in FY21. FY22 is expected to see positive low single-digit reversions and the absence of rental rebates. Our FY21-22E GDPU of 3.9-6.9 sen (NDPU of 3.5-6.2 sen) imply gross yield of 2.7-4.8% (net yield of 2.5-4.4%).

Maintain MARKET PERFORM and TP of RM1.30 as our valuations are based on a more normalized FY22E GDPS/NDPS of 6.9 sen/6.2 sen and +1.6ppt (at +0.5SD) to our 10-year MGS target yield of 3.60%. We are optimistic on earnings here forth, but caution the Group’s high lease expiries in FY22 could be a negative should there be further disruptions to retail business activity. As such, we believe our above average spread is justified in accounting for these potential risks, while the more stable MREITs are based on average SD.

Risks to our call include: (i) bond yield compression, vs. our target 10-year MGS yield, and (ii) strengthening rental income.

Source: Kenanga Research - 29 Oct 2021