KIP REIT hosted an analyst briefing last Friday. Key topics covered in the briefing included: (1) satisfactory operational performance, (2) OPR hike impact minimal to DPU, (3) aims to grow non-retail assets to 30% of the total enlarged portfolio, and (4) private placement to complete by next month. We factor in higher occupancy, average rental rates, and margin assumptions. We also take this opportunity to input the earnings contribution from the new industrial assets in Klang and the 20% private placement. In all, our FY23 and FY24 earnings forecasts are raised by 11% and 15%, respectively. Nonetheless, our FY23 & FY24 EPU and DPU are diluted by 8% and 4%, respectively. Post earnings adjustments, we raise KIP REIT’s TP to RM1.02 (from RM1.00), based on a revised target yield of 6.5%. Maintain Buy.

Satisfactory operational performance

KIP REIT’s FY22 realised a net profit of RM36.0mn, which came in at 103% of our full-year projections, was 0.1% lower than last year in tandem with a 0.7% decline in revenue. Benefitting from the reopening of the economy, occupancy rates show steady improvement (Figure 1), except for KIPMall Bangi, where a major facelift was carried out in the mall, in addition to the exit of an anchor tenant of KIPMall Bangi, which took up about 20% of the NLA, vacated the mall since Feb 2022. Positively, management shared that a new anchor tenant (Hero Supermarket) had commenced operations in Jul 22 and is expected to increase KIPMall Bangi’s occupancy rate to 70%. The management anticipates that KIPMall Bangi's occupancy rate to recover to 85% by September 2023, following the completion of a major facelift.

OPR hike impact minimal to DPU

Management will continue to manage the existing portfolio and adopt prudent capital management to provide unitholders with a sustainable DPU. Management believes that KIP REIT is largely insulated from an expected rise in interest rates over the next 12 months due to its high proportion of fixed-rate debt and low need to refinance. Note that about 68% of its borrowings are based on fixed rate financing. Accordingly, a 25bps rise in interest rates would lead to an RM0.25mn decline in net profit (-0.6% impact on the bottom line), which is rather minimal.

Aims to grow non-retail assets to 30% of the total enlarged portfolio

Management will keep evaluating growth opportunities in its existing and new asset classes, including retail, commercial, and industrial assets. To recap, KIP REIT announced its first acquisition of industrial assets in Klang for an aggregate purchase price of RM78.7mn last month. While there is not a specific purchase target on the table at the moment, management shared that it will continue to pursue yield-accretive investment opportunities in the industrial and logistics space as part of its diversification strategy toward increasing the proportion of non-retail assets in KIP REIT’s enlarged portfolio to 30%. That said, the target of growing its portfolio value from RM852mn to RM1.5bn by FY26 remains intact.

Private placement to complete by next month

To recap, KIP REIT has proposed to undertake a private placement to raise approximately RM80.8mn of which RM79.8mn is allocated for future yieldaccretive asset acquisitions to create long-term value for unitholders. Management shared that the issue price for the first tranche (52.5mn placement units) of the placement units is fixed at RM0.805 per placement Unit. The first tranche is expected to be listed and quoted on the exchange this week. Meanwhile, the second tranche (balance 48.6mn placement units) is targeted to be placed out to investors before 25 Aug 2022, being the extended deadline granted by Bursa. With that, we expect KIP REIT to fully finance the acquisition of industrial assets in Klang with the proceeds from the private placement.

Forecast

Post briefing, we factor in higher occupancy, average rental rates, and margin assumptions in our earnings model. We also take this opportunity to input the earnings contribution from the new industrial assets in Klang. In all, our FY23 and FY24 earnings forecasts are raised by 11% and 15%, respectively. Nonetheless, our FY 23 & FY24 EPU and DPU are diluted by 8% and 4%, respectively, as we assume the 20% private placement and asset acquisition to be completed in 1QFY23 and 4QFY23, respectively. We introduce FY25 DPU forecasts of 7.2sen, representing a stable growth of 3%.

Valuation

While the proposed private placement will initially be dilutive to DPU, we believe the proceeds raised will bode well and come in handy, especially for large and accretive acquisitions, while also relieving potential balance sheet stress. Meanwhile, we continue to favour KIP REIT's resilient performance, as KIPMalls stand to benefit from the loss in consumer spending power caused by the increased cost of living, as consumers become more price-conscious and opt for less expensive alternatives.

Post EPU and DPU adjustments, we raise KIP REIT’s TP to RM1.02 (from RM1.00), based on the revised target yield of 6.5% (previous 7%). Maintain Buy.

Source: TA Research - 1 Aug 2022