We are initiating coverage on KIP Real Estate Investment Trust (KIP REIT) with a Buy recommendation. Our TP is based on a target yield of 7% to our CY23 DPU projection of 7.0sen/unit. We like KIP REIT for its 1) diversified tenant mix cushions unexpected economic shocks, 2) attractive organic and inorganic growth prospects, and 3) above sector average distribution yield.

Background

KIP REIT was listed on the Main Market of Bursa Malaysia on 6 Feb 2017. It has seven retail properties located in Tampoi, Kota Tinggi, Masai, Senawang, Melaka, Bangi and Ipoh. Valued at RM808mn, its seven malls span 1.5mn sq. ft. of net lettable area. KIP REIT shall distribute at least 90% of its distributable income on a quarterly basis.

Investment Merits

1) Diversified tenant mix cushions unexpected economic shocks;

2) Attractive organic and inorganic growth prospects and,

3) Above sector average distribution yield.

Forecasts and Valuation

We forecast KIP REIT’s 4QFY22 earnings to decline 6.4% QoQ to RM8.5mn, bringing the full year net profit to RM35.1mn (-2.7% YoY). The decline is to factor in the major asset enhancement initiatives at KIPMall Bangi, which commenced in Mar-22. For FY23-24, we anticipate EPU growth of 7.7-8.5% underpinned by 1-3% growth in rental rates, stable occupancy rate of 88 – 92% and net property income (NPI) margin of ~77%.

Assuming a 90% payout ratio, we project KIP REIT to distribute 6.2-7.3 sen per unit for FY22-24. We value KIP REIT at RM1.00, based on a target yield of 7% to our CY23 DPU projection of 7.0sen/unit.

Source: TA Research - 29 Jun 2022