Wider forward yield spread; U/G to POSITIVE

The spread between M-REITs’ forward dividend yield and MGS’s 10-year yield is on an upward trend due to better earnings prospects of M-REITs and moderately lower MGS yield. The higher yield spread offers a better risk-reward prospect for M-REITs with the sector now trading at 6.0% 12M fwd. average net yield, 233 bps above the 10Y-MGS yield. In 1H24, the sector’s core net profit grew 8.2% YoY and we forecast 8.3% core earnings growth in 2024E and 9.8% in 2025E. Upgrade to POSITIVE. Our top BUY pick for the sector is Axis REIT (AXRB MK, CP: MYR1.84, BUY, TP: MYR2.12).

Stable OPR offers temporary respite to financing cost

Debt profile of most M-REITs under our coverage still comprise mainly of floating rate loans – ranging from 9% of total debt for KLCCP, to 100% for ALSREIT (Fig. 9), and averaging 54% (MYR11.5b out of total debt of MYR21.2b) for the sector as at end-2Q24. Meanwhile, M-REIT’s average interest costs in 1H24 had ranged between 3.9% to 6.0% (Fig. 10). Our Economics Research Team expects the OPR to remain at 3% in 2024 and 2025. The stable OPR offers a temporary respite after higher financing cost experienced in 2023.

Expect CY24/25E earnings growth of +8.3%/+9.8%

For the sector, we forecast +8.3%/+9.8% core earnings growth in CY24/25E (CY23: +4.9%), to be supported by sustained occupancy and rental rates, coupled with new asset injections. We continue to like M-REITs that are invested in the industrial segment for their resilient earnings due to long- term tenancies, with rental reversion outlook remaining strong. We also favour selective M-REITs with matured retail assets located in prime locations which would enable them to sustain their high occupancy rates, and allow for positive rental reversions too.

Defensive sector

BM REIT index has risen +9.6% YTD (@ 30 Sep), albeit still underperforming the broader KLCI (+13.9%). The former’s rise was mainly due to the start of the US FFR easing cycle and improved earnings delivery expectation. REITs continue to be the preferred defensive sector with dividends to be supported by resilient earnings and sustainable payouts. The sector offers average CY24/25E net DPU yields of 5.3/6.3% respectively.
 

Source: Maybank Research - 16 Oct 2024