1QFY22 realised net income (RNI) of RM85.4m came in within our and consensus expectations at 29% each. FY22 GDPU of 2.51 sen is also within (30%). Maintain FY22-23E CNP of RM293-299m. Downgrade to MARKET PERFORM (from OUTPERFORM) on a lower TP of RM1.55 (from RM1.60) post rolling our valuations forward to FY23E but on a higher 10-year MGS target of 4.15% (from 3.90%) in line with our in-house estimates.

1QFY22 realised net income (RNI) of RM85.4m came in within our and consensus expectations at 29% each. A 1QFY22 dividend of 2.51 sen was declared, which included a 0.01 sen non-taxable portion, which is also within at 30% of our FY22 estimate of 8.25 sen, implying 5.3% gross yield.

Results’ highlight. QoQ, top-line was up by 12% as a result of lower rental support and recovery in footfall and vehicle traffic at the malls. The overall rather flattish cost allowed bottom-line to increase by 16%. YoY-Ytd, GRI bounced back by 35% on less rental support during the quarter while asset occupancy remains healthy at >99%. All in, RNI increased by 95%. Gearing remained stable at a low level of 0.23x, well below MREITs’ gearing limit of 0.60x.

Outlook. The economy is well on track to resume reopening and shopper traffic is expected to pick up in coming months as the Covid-19 situation becomes more manageable. That said, the Group remains cautious and does not fully discount the possibility of future rental assistance barring any unforeseen circumstances, but we believe the likelihood of that happening is low at this juncture. FY22 will see 23% of leases expiring at Mid Valley and 45% at The Gardens which the Group has already secured close to half of the leases up for expiry. We do not expect the acquisition of Southkey Mall in Johor to happen in the near term as the pandemic may have pushed back the timeline for this acquisition for now, likely to FY24-25.

Maintain FY22-23E CNP of RM293-299m on flattish to low single-digit positive reversions and the expectation of less rental holidays compared to FY20 and FY21. Our FY22-23E GDPU of 8.25-8.38 sen (NDPU of 7.42-7.54 sen) suggest gross yield of 5.3-5.4% (net yield of 4.8-4.8%).

Downgrade to MARKET PERFORM (from OP) on a slightly lower TP of RM1.55 (from RM1.60). We roll forward our valuations to FY23E GDPS/NDPS of 8.38 sen/7.54 sen but we also adjust our 10- year MGS target higher to 4.15% (from 3.90%) in line with our in-house forward estimates. Our applied spread is at +0.5SD, on par with other pure retail MREITs under our coverage as we remain mildly cautious at this juncture. Both FY22 and FY23 are set to be recovery years for retail MREITs with IGBREIT having one of the better retail assets under our coverage. That said, we will continue to remain cautious and monitor the situation, but believe the likelihood of further disruptions to malls’ operations and hence earnings are lower going forward.

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

Source: Kenanga Research - 28 Apr 2022