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Top Pick: Axis REIT. M-REITs under our coverage ended 2022 on a strong footing with revenue and net property income (NPI) equalling pre-pandemic levels. Despite fears of a global recession, M-REITs’ performance should continue to improve thanks to the strong domestic economy and increasing tourist numbers. We maintain our NEUTRAL call on the sector – we think the risk reward profile is fairly balanced as represented by the 7% increase in the KL REIT Index in recent months.
4Q22 results in line with expectations. Out of the six M-REITs under our coverage, only KLCCP Stapled’s results beat our estimates with a better- than-expected recovery in all segments, while the remaining five met expectations. The retail and hotel segment saw the highest growth from improved occupancy rates, leading to a full-year 23% YoY growth in sector revenue, with NPI margin recovering closer to pre-pandemic levels at 68%. Axis REIT, the leading industrial REIT, continued to improve YoY with rental contribution from new acquisitions kicking in, whereas Sentral REIT, a pure player in the office segment, reported lower earnings from lower occupancy rates after losing two key tenants in 1H22.
Retail outlook. The improving tourism industry, especially following China’s reopening in January, will likely provide a boost to the more tourist- reliant malls in Kuala Lumpur such as Pavilion Kuala Lumpur and Suria KLCC, as well as the hotel industry. Management guidance on rental reversion ranges from a positive low to mid-single digit for FY23 – higher than the flattish to positive low-single digit in FY22 – on the back of the strong retail momentum in the past 12 months. Aside from IGB REIT with its fully-tenanted malls, there is still room for occupancy rate to grow, but this will be mitigated by the incoming supply of retail space.
Minimal catalysts for offices. The office segment continues to struggle from the increasing supply of office space which places downward pressure on occupancy and rental rates. However, the downside risks for Sentral REIT is limited in our view, as the leases up for renewal in FY23 are for its stronger assets such as Platinum Sentral and Menara Shell, with management expecting rental reversion to be flattish.
Sector Picks. Axis REIT remains our sector Top Pick with the REIT’s acquisition and redevelopment plans expected to drive earnings growth in the medium to long term. The supply-demand dynamics for the industrial sector remains favourable given the growing demand for third-party logistics assets. Pavilion REIT is our pick for the retail segment now. There is still room for the REIT’s blended occupancy rate to rise, particularly for Da Men Mall, which stood at 65% as of 4Q22, and the planned acquisition of Pavilion Bukit Jalil in 2Q23 is also positive for the REIT’s long-term prospects as the new mall will be another key income contributor apart from Pavilion Kuala Lumpur.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....