Expecting a Strong End to FY23

KIP REIT is scheduled to announce its final quarter results ended 30 June 2023 next week. Our estimates indicate a strong performance, with 4QFY23 realised net profit expected to range between RM11 – 13mn, showing significant growth of 4 - 23% QoQ and 16-37% YoY. Building upon the robust 4Q performance, we expect KIP REIT’s full-year realised net profit for FY23 to grow by 12-17% YoY, reaching RM40.2 - 42.2mn, equivalent to 96-101% of our full-year projections.

Strong 4Q Performance to be Anchored by Higher Retail Footfall and Festive Season Sales

The anticipated stellar 4Q performance can be attributed to multiple factors, primarily the increasing retail footfall and promising retail sales during the Ramadan and Hari Raya Festive seasons. Additionally, we expect KIP REIT to deliver positive rental reversion estimated in the mid-single digit, benefiting from a gradual recovery from the pandemic. In the first nine months of FY23, KIP REIT renewed 82% of tenancies due in FY23 with mid-single-digit positive rental reversions. Meanwhile, we expect the average portfolio occupancy rate to remain steady at 90-95%..

Low-base Effect and Newly Acquired Industrial Assets to Boost Full-Year Performance

For the full year of FY23, we expect more robust performance due to 1) a low base in FY22 due to FMCO, 2) steady growth in existing community-centric malls, which provides predominantly essential items and 3) lease income from the three newly acquired industrial properties in Klang (acquisition concluded on 15 December 2022).

Promising Growth Prospects for FY24

We believe KIP REIT's growth prospects for FY24 are promising, supported by both organic and inorganic expansion strategies.

The management will continue to grow the REIT’s assets organically by concentrating on asset enhancement initiatives. A facelift asset upgrade project at KIPMall Bangi, which includes interior design enhancements, facility improvements, and facade upgrades, is nearing completion and is expected to raise the mall's occupancy rate from 73% to 90% upon completion in September 2023.

In terms of inorganic growth, the proposed acquisition of KIPMall Kota Warisan for RM80mn is a significant milestone for KIP REIT, expanding its total assets under management beyond RM1.0bn. This acquisition is expected to be yield accretive, with a net property income yield of 8.0%, surpassing the average yield of KIP REIT's other retail properties for FY22 (6.7%) and our projected FY24 distribution yield (7.8%). The acquisition is scheduled for completion in 4Q23 (or 2QFY24). Overall, we are positive about the acquisition due to its appealing purchase price and the potential for earnings accretion – refer to our report dated 19 June for more information.

Management aims to grow the portfolio through accretive acquisitions of diverse assets, including quality retail, industrial, and commercial properties from KIP’s pipeline and third-party acquisitions. Aside from this, the management team is optimistic about expanding the industrial asset base and securing long-term tenancies with stable returns, given the anticipated strong performance of the industrial sector. Furthermore, KIP REIT has set a target of increasing the portfolio value to RM1.5bn by FY26.

Forecast

Maintain FY23-FY25 earnings forecasts.

Valuation

We maintain our Buy recommendation on KIP REIT with an unchanged target price of RM1.05, based on a CY24 target yield of 6.75%.

Source: TA Research - 20 Jul 2023