INVESTMENT HIGHLIGHTS

• 1QFY17 earnings in line

• Expect stronger sequential earnings

• Stable earnings outlook

• Maintain BUY with unchanged TP of RM1.15

1QFY17 earnings in line. AmanahRaya REIT (ARREIT) 1QFY17 core net income of RM8.3m came in within expectation, making up 23% of our full year estimates. Comparison to consensus estimate is unavailable as ARREIT is only covered by us. ARREIT declared distribution per unit of 1.43sen for 1QFY17.

Expect stronger quarters ahead. On a sequential basis, 1QFY17 core net income of ARREIT was stable, inched up by a marginal 0.16%qoq. Meanwhile, 1QFY17 core net income declined 12%yoy to RM8.3m, mainly due to lower rental contribution from few assets namely AIC factory in Shah Alam, Holiday Villa in Alor Setar, and South City Plaza in Seri Kembangan. While the decline in earnings in not unexpected, we forecast stronger earnings going forward as we expect earnings contribution from newly acquired assets (Deluge Factory in Johor, Toshiba TEC in Bandar Glenmarie, and Contraves Building in Cyberjaya) to make up the shortfalls.

Stable earnings outlook. We maintain our earnings forecast for FY17/18. We estimate earnings of ARREIT to remain stable in FY17 with our earnings growth forecast of 2%yoy, underpinned by stable rental income from its assets. Meanwhile, we forecast FY18 to grow at 7.5%yoy mainly driven by lease renewal of SEGi University in Kota Damansara which is its top rental contributor.

Maintain BUY with unchanged TP of RM1.15. Our TP is based on DDM model (required rate of return: 7.7%, terminal growth rate: 1%). We maintain our BUY recommendation on ARREIT for its education property exposure (42% gross rental contributed from education properties) where rental reversion is typically resilient at 5-7%. Besides, prospect for asset management of ARREIT is positive following the entry of Kenedix Inc. as a substantial shareholder in December 2016. Meanwhile, dividend yield is attractive at 5.7%.

Source: MIDF Research - 31 May 2017