KEY INVESTMENT HIGHLIGHTS

• 1QFY20 earnings within but coming quarters may be weaker

• CNI declined by -4.4%yoy as revenue dropped -5.3%yoy

• Earnings forecast revised as we expect weaker year-onyear CNI

• Maintain Neutral with a lower TP of RM0.68

Amanahraya REIT’s (AARET) 1QFY20 core net income (CNI) of RM8.7m met our full year expectation at 23%. No dividend was announced this quarter as the REIT manager reduces its payout frequency from quarterly to semi-annually. This was due to the uncertainties in face of the Covid-19 outbreak. Although 1QFY20 CNI met our expectation, we expect a softer year-on-year CNI amid the Covid-19 pandemic and a more challenging operating environment that could adversely impact its rental income.

CNI declined by 4.4%yoy as revenue dropped by 5.3%yoy. AARET recorded lower core net income of RM8.7m (-4.4yoy) for the first quarter, as revenue came in at RM22.6m. The lower rental income was attributed to the loss of settlement income. Property expenses increased by +29.9%yoy to RM4.8m due to refurbishment cost and maintenance expenses incurred at Vista Tower, Selayang Mall and Dana 13. This was partially offset by lower borrowing cost which fell to RM7.2m from RM8.4m in 2019 following the settlement of Affin Term Loan and the lower overnight policy rate.

Earnings forecast revised as we expect weaker yoy CNI. In view of the challenging rental market outlook, we do not rule out potentially lower rental income in-line with the overall industry trend of supporting tenants by extending rental rebates or other forms of assistance. As such, we revise our FY20E earnings estimate downwards by -12.6% and FY21F CNI by -7.6%. We are also assuming lower rental reversions.

Maintain Neutral with a lower TP of RM0.68 (previously RM0.73). Corresponding to our earnings downward revision, our TP for ARRET is revised to RM0.68 from RM0.73. We maintain Neutral on AARET as we continue to believe the growth prospect of AARET will be subdue in the near-term. However, this is supported by a decent net distribution yield of 7.2%.

Source: MIDF Research - 24 Jun 2020