• A diversified REIT with exposure to education property

• Potential asset rejuvenation following entry of Kenedix

• High yield REIT backed by stable earnings

• Attractive valuation

• Initiate with BUY with Target Price of RM1.15

A diversified REIT with exposure to education property. AmanahRaya REIT (ARREIT) is a well-diversified REIT, managing 15 properties of several types namely education, office, retails, industrial, and hotel with a total asset value of RM1b. ARREIT is having the highest exposure to education property as comparing to other Malaysian REITs by having education buildings under its asset portfolio namely SEGi College, SEGi University, and HELP University. In FY16, education buildings made up 32% of total asset value and contributed 42% to gross rental income.

Potential asset rejuvenation following entry of Kenedix. Kenedix Inc, a Japanese real estate asset management company, had on 19 December 2016 entered into strategic agreement to buy 15% stake in ARREIT and 49% stake in AmanahRaya REIT Managers Sdn Bhd. We are positive on the entry of Kenedix as it provides opportunities to ARREIT to leverage on Kenedix’s expertise in asset management initiatives while also allowing ARREIT to secure high quality tenants by tapping into network of Kenedix. We understand that managements of ARREIT and Kenedix are working closely to improve the asset portfolio of ARREIT which we believe would bring fresh impetus to ARREIT.

High yield REIT backed by stable earnings. ARREIT is a high yielding REIT, with net dividend yield of ~5.6% (sector average: 5%). Looking forward, we forecast ARREIT’s FY17 DPU to maintain at 6sen. We expect earnings of ARREIT to remain stable in FY17 before growing by 7.5%yoy in FY18 as FY18 earnings will be mainly driven by lease renewal of SEGi University in Kota Damansara which is its top rental contributor. Meanwhile, we reckon that Silverbird Factory which located in Petaling Jaya could be another income catalyst as ARREIT has successfully repossessed the factory in 3Q16 after winning the court case against High-5 Conglomerate Berhad. The factory should enhance ARREIT’s FY18 earnings through higher rental income or one off disposal gain.

Attractive valuation. Valuation of ARREIT is attractive, trading at price to net asset value (P/NAV) of 0.8x while most of the REITs are typically trading above NAV. We think that the discount to NAV is unjustified, considering that most of its assets under portfolio are having stable property valuation. As such, we believe ARREIT is undervalued where higher P/NAV should be warranted.

Initiate with BUY and TP of RM1.15. We initiate coverage on ARREIT with a BUY call and TP of RM1.15. We opine that ARREIT is an under-researched counter which should attract interest of yield seeking investors. Its rental income is partly back by its unique education property exposure. Besides, the entry of Kenedix Inc bodes well for the asset management prospect for ARREIT

Source: MIDF Research - 2 Mar 2017