Selectively take profit

We believe the potential exclusion of Malaysia from FTSE Russell’s World Government Bond Index (WGBI) could momentarily negatively impact the M-REITs sector, on anticipated increase in government bond yields. Our earnings estimates and TP are unchanged for now and we maintain YTLREIT as our top BUY for the sector. That said, with M-REITs’ unit prices having moved up by as much as 15% YTD, we think it is time to take profit on some. The sector’s average CY19 net DPU yield is 5.2%.

Reclassification downgrade risk

FTSE Russell announces that Malaysia has been put on its watch list for a potential disqualification from its WGBI, favouring China. Malaysia’s market accessibility level, now assigned a ‘2’ and included in the FTSE WGBI since 2004, is being considered for a potential downgrade to level ‘1’ which would render Malaysia ineligible for inclusion in FTSE WGBI. The final decision may be made in the upcoming Sep 2019 annual review. The FTSE WGBI is a widely used benchmark that includes sovereign debt from over 20 countries and denominated in a variety of currencies - a broad benchmark for the global sovereign fixed income market.

Momentarily negative on M-REITs

We believe the potential exclusion of Malaysia from the FTSE WGBI is momentarily negative on the M-REITs sector. This event would result in higher government bond yields, in turn, switching investors’ preference from M-REITs on expectation that the net yield spread would be sustained at about 100-200bps. As at 16 Apr 2019, the net yield spread is just 129bps (average M-REITs’ net DPU yield of 5.2% vs. 10-year MGS yield of 3.88%). We view this as an opportunity to take profit on selected M- REITs, especially those whose potential yield have fallen to below 5%.

Downgrading SUNREIT, IGBREIT

Our earnings estimates are unchanged at this juncture. We maintain our NEUTRAL rating on the sector as selected M-REITs still provide decent net DPU yields, backed by defensive rental income flow and/or with growth catalysts (i.e. acquisitions) intact. Our top BUY is YTLREIT (MYR1.30 TP), premised on resilient rental income from its master lease assets in Malaysia and Japan, and strong pipeline of hotel assets. Our other BUY is MQREIT (MYR1.11 TP). We downgrade on SUNREIT to HOLD on a narrowed 5% upside to our unchanged TP, and IGBREIT to HOLD on a 4% downside.

Source: Maybank Research - 10 Jun 2019