• MYR0.51 FV based on DDM (Ke: 9%). We think that AmanahRaya REIT is at an inflection point. After a series of tenancy non-renewals since the pandemic, it has secured new tenants that will increase its occupancy rates. ARREIT is also embarking on a strategic pivot to focus on education assets – we think provides a more defensive and stable supply of income than its office assets. It signed a sale & purchase agreement (SPA) for the disposal of its hospitality assets as part of its portfolio rebalancing efforts.

• Inflection point for earnings. ARREIT’s portfolio occupancy fell from 86% at end-FY19 to just 74% as at 2Q23, mostly due to the non-renewals in Vista Tower, Dana 13, and Toshiba Tec (vacant since May 2022). The nonrenewals were attributed to the impact of the pandemic as its tenants embraced a hybrid work model. However, we think FY23 should be the bottom for earnings as ARREIT has secured new tenants following its asset enhancement initiatives (AEI) and active leasing efforts. With new tenants signed for Vista Tower and Toshiba Tec, we expect the average portfolio occupancy rate to recover back to 78% in FY24F and 83% in FY25F.

• Pivot to education. Following a change in management, the REIT is embarking on a strategic pivot to focus on education assets. The REIT’s three education assets – SEGi University, HELP University, and SEGi College make up just 24% of the REIT’s total asset value, but contributed 42% of its total NPI in FY22 with a high NPI yield of 7.8%. We think the shift could prove fruitful as education assets are resilient to market changes and can weather economic cycles. As part of its strategy, management has expressed that it is open to disposing its office assets including Vista Tower to fund acquisitions of education assets.

• Exiting lower-yielding hospitality segment. In Jun 2023, ARREIT announced it had entered a SPA to dispose Holiday Villa, Langkawi for MYR145m. While it afforded a stable stream of income due to its long-term master lease, it only provided a NPI yield of 3.8%. MYR70m of the proceeds will be used to repay borrowings, and we expect the savings from borrowing costs to offset the loss of income while it takes time to secure new acquisitions.

• Forecasts and FV. We expect ARREIT to record a FY22-25F earnings CAGR of 10% driven by higher occupancy rates and lower borrowing costs. Our DDM-derived FV implies a 0.4x P/BV, which is at -1SD from its historical mean. We think the current valuation is undemanding, at below -2SD, after the 32% drop in share price in the past year. Our FV also implies a FY24F yield of 7%.

• Key downside risks include lower-than-expected occupancy rates, decline in asset value, and higher-than-expected property expenses. 

Source: RHB Securities Research - 28 Dec 2023