Review

• Excluding the one-off expenses incidental to the acquisition of the 3 industrial properties of RM1.8mn, KIP REIT’s 1HFY23 realised net profit of RM18.7mn (+7.3% YoY) came in within expectations, accounting for 45% of our full year forecasts. We anticipate stronger performance in the 2H, driven by improved occupancy and rental rates, as well as additional income from newly acquired industrial assets.

• 2QFY23 DPU stood at 1.45sen/unit, bringing 1HFY23 DPU to 2.9sen/unit (-6.5% YoY). The drop in 1HFY23 DPU was attributable to an 11% rise in outstanding units after the completion of two private placement tranches during the period under review. Nevertheless, it was within our forecasts, accounting for 47% of our full-year FY23 DPU projection of 6.2sen.

• KIP REIT’s 1HFY23 realised net profit climbed by 7.3% YoY, driven by 1) low base in 1HFY22 due to FMCO, 2) a higher portfolio occupancy rate of 92.7% (+4.1%-pts YoY) and 3) 18 days of lease income from the 3 newly acquired industrial properties in Klang.

• QoQ, KIP REIT realised net profit grew 12.7% to RM9.9mn on the back of 5.7% growth in net property income. Stronger sequential results were largely driven by the maiden contribution from the 3 newly acquired industrial properties.

• Gearing increased to 34.3% from 32.9% a quarter ago, owing to an increase in borrowings to partially finance the acquisition of industrial properties in Klang.

Impact

• Maintain earnings forecasts.

Conference Call Highlights

• Management keeps a positive outlook for the remainder of FY23, which is backed by the growth of the retail segment and the existing community portfolio, which mostly offers necessities. Additionally, the recent completion of the acquisition of industrial assets will boost the group’s performance in 2HFY23.

• Besides, management will continue to manage the existing portfolio and adopt prudent capital management in order to provide Unitholders with a sustainable DPU. We believe 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 64% of its borrowings are based on fixed rate financing. Accordingly, a 25bps rise in interest rates would lead to a RM0.3mn decline in net profit (-0.7% impact on the bottom line), which is rather minimal.

• While there isn't a specific acquisition 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 towards increasing the proportion of non-retail assets in KIP REIT’s enlarged portfolio to 30%. To recap, management targets to grow KIP REIT’s portfolio value to RM1.5bn (from RM931mn) by FY26.

Valuation

• KIP REIT is currently trading at a FY24f dividend yield of 7.7%, which is attractive as compared to its peers’ average forward yield of 6.9%. We roll forward our valuation base year to CY24. Consequently, we arrive at a new TP of RM1.05 (previous RM0.98), based on a target yield of 6.75% to our CY24 DPU projection of 7.1sen/unit. With a total upside of 16%, we upgrade KIPREIT to Buy from Hold previously.

Source: TA Research - 18 Jan 2023