We came away from KIP REIT’s 1QFY24 results briefing feeling upbeat about the trust’s near-term prospects. The key takeaways are as below:

Resilient 1QFY24 Operational Performance

In the first quarter of FY24, KIP REIT's average portfolio occupancy rate increased to 94.1%, up from 90.9% in the corresponding quarter of the previous year. All assets under management have maintained occupancy rates exceeding 85%, with exceptions for KIPMall Bangi at 80% and KIPMall Kota Tinggi at 84%. Ongoing major renovations impacted the occupancy rate at KIPMall Bangi. Meanwhile, KIPMall Kota Tinggi experienced a decrease in occupancy due to the departure of an anchor tenant (Songmart), which previously occupied approximately 25% of the net lettable area and left the mall in June 2023. However, management has shared positive news that a new anchor tenant (Hwa Twai Supermarket) began operations in August and is expected to raise KIPMall Kota Tinggi's occupancy to over 90%.

By the end of 1QFY24, nearly 80% of tenancies due in FY24 had been renewed, showing a positive mid-single-digit rental reversion. Consequently, management does not anticipate any notable vacancy risks for the year.

KIPMall Bangi to Complete the Facelift by the End of the Year

Management confirmed that they are on schedule to complete the major asset enhancement initiative for KIPMall Bangi this year. The mall is currently undergoing a phased reopening, with the latest occupancy rate standing at 85%, compared to the 80% recorded in Sep 2023. Upon the completion of renovations, management anticipates the occupancy rate at KIPMall Bangi will surpass 90%.

KIPMall Kota Warisan to Contribute From 3QFY24 Onwards

KIP REIT's unitholders recently approved the proposed acquisition of KIPMall Kota Warisan. Management anticipates the completion of this acquisition in 1QCY24 (3QFY24). This is a significant milestone for KIP REIT, expanding their assets under management beyond RM1.0bn. Following the acquisition, KIP REIT's portfolio will encompass 11 properties, comprising 8 community malls and 3 industrial properties. We are positive on this yield-accretive acquisition in light of the 7.9% net property income yield, which exceeds the average yield of 6.5% for KIP REIT's other retail properties in FY23.

Aims to Grow Portfolio Value to RM1.5bn Over the Next 5 Years

Following the injection of KIPMall Kota Warisan, KIP REIT retains three Right of First Refusal (ROFR) assets granted by its promoters, namely KIPMall Sungai Petani, KIPMall Desa Coalfields, and KIPMall Kuantan. Strategic initiatives are being actively pursued to nurture and enhance these assets, with plans to inject them into KIP REIT as they mature. Additionally, the management team is optimistic about the REIT's potential to expand its industrial asset portfolio and secure long-term, stable tenancies, given the anticipated strong performance of the industrial sector. In the long term, the KIP REIT management team has set a target of increasing the portfolio's value to RM1.5bn over the next five years.

Forecast

Our FY24-26 earnings forecasts have been adjusted upwards by 2% to 9% to reflect the earnings contribution from KIPMall Kota Warisan. However, the FY24-26 EPU & DPU are only raised by 1% to 6% due to the incorporation of 12.3mn new placement units, resulting in a 2% increase in the total units issued.

Valuation

Post EPU and DPU adjustments, we raise KIP REIT’s TP to RM1.08 (from RM1.04), based on an unchanged CY24 target yield of 6.75%. Maintain Buy.

Source: TA Research - 25 Oct 2023