Review

• Excluding the one-off expenses incidental to the acquisition of the three industrial properties of RM1.8mn and fair value gains on investment properties of RM23.1mn, KIP REIT's FY23 realised a net profit of RM39.5mn (+9.5% YoY) fell short of expectations, accounting for 94% of our full-year forecasts.

• The negative variance was largely due to higher-than-expected finance costs. Notably, FY23 net property income (NPI) aligned with 98% of our forecasts.

• 4QFY23 DPU stood at 1.75sen/unit, bringing FY23 DPU to 6.2sen/unit (- 8.8% YoY). The decline in FY23 DPU was caused by a 15% increase in outstanding units as a result of three private placements completed during the period under review. Despite the slight deviation from our earnings projections, our forecast for FY23 DPU was spot-on. Based on the last closing price, FY23 DPU of 6.2sen translates to a yield of 6.9%.

• KIP REIT’s FY23 realised net profit increased by 9.5% YoY, alongside a 13.6% rise in revenue. The improved performance was primarily attributable to 1) a low base in FY22 due to FMCO, 2) steady growth in the retail segment and 3) lease income from the three newly acquired industrial properties in Klang (acquisition completed on 15 December 2022). However, the FY23 NPI margin decreased by 2.8% points to 74.2% due to higher property expenses such as utilities, reimbursement costs, and building maintenance.

• QoQ, KIP REIT's 4QFY23 realised net profit decreased 2.7% to RM10.2mn despite a 2.6% increase in revenue. The decrease in net income was primarily attributable to higher property expenses, such as utilities and building maintenance.

Impact

• After adjusting for 1) actual FY23 results and 2) higher cost of debt assumptions, we reduce our earnings forecasts for FY24 and FY25 by approximately 4%. Meanwhile, our projections for FY24 and FY25 DPU decreased only by approximately 1% as we revised our distribution payout assumption from 90% to 93%.

• We introduce our FY26 DPU estimates of 7.4sen/unit, representing a modest increase of 3.1%.

• We have yet to incorporate the contribution from KIPMall Kota Warisan and the effect of private placement into our earnings model, pending the completion of the exercise scheduled for the end of 2023 (or the end of 2QFY24).

Outlook

• Management remains optimistic about KIP REIT's prospects, citing the strong performance of the existing property portfolio and ongoing efforts to improve leasing and operational strategies. They actively pursue high quality investments, reinforcing their belief in sustaining stable performance throughout FY24. Additionally, management is committed to prudent capital management to deliver sustainable DPU to Unitholders and will explore growth opportunities in retail and industrial sectors.

Valuation

• After factoring in the change in our DPU projections, we reduced our TP to RM1.04 (previously RM1.05), based on an unchanged CY24 target yield of 6.75%. Maintain Buy.

Source: TA Research - 25 Jul 2023