TA Sector Research

KIP Real Estate Investment Trust - Resilient Community Mall Portfolio

Publish date: Thu, 18 Apr 2024, 10:14 AM

We expect KIPREIT’s 3QFY24 results will show a stronger QoQ performance, ranging from RM11-12mn, primarily driven by the maiden contribution from the newly acquired KIPMall Kota Warisan. We are sanguine about the outlook for KIPREIT due to (i) the resilience of its community mall portfolio, (ii) promising opportunities for growth through acquisitions, and (iii) the above-sector average distribution yield. No change to our earnings forecasts. Rolling forward our valuation base year to CY25, we arrive at a new TP of RM1.14/share, based on an unchanged target yield of 6.75%. Reiterate Buy.

Results Preview

KIPREIT is scheduled to release its 3QFY24 results next week. We expect realised net profit for 3QFY24 to show a stronger QoQ performance, ranging from RM11 – 12mn, indicating a 3-13% increase compared to the previous quarter. This growth is expected to be driven by the maiden contribution from KIPMall Kota Warisan, following its acquisition completion on 8th Feb, 2024. For the cumulative 9-month period, we anticipate 9MFY24 realised net profit to come within the range of RM32 - 33mn, constituting 69 -72% of our full-year forecasts. This reflects a decent YoY growth of 10-13%.

Resilient Community Mall Portfolio

In the face of rising inflation, we firmly believe that KIPMalls are poised to thrive amidst the decline in consumer purchasing power. As consumers increasingly prioritise the combination of quality products at affordable prices, communitycentric retail malls like KIPMalls emerge as compelling alternatives to traditional hypermarkets and neighbourhood retail centres, especially in smaller towns and suburban areas. Our conviction is supported by KIPREIT's resilient NPI performance over the years and its upward trajectory in occupancy rates in recent quarters.

In 2QFY24, the average occupancy rate reached an unprecedented 94.7%, driven by successful additions like Hwa Twai Supermarket at KIPMall Kota Tinggi. Despite minor exceptions, with KIPMall Bangi and KIPMall Senawang slightly below the 90% mark due to ongoing renovations and tenant departures, respectively, KIPREIT's overall portfolio has consistently maintained strong occupancy rates surpassing 90%. With the scheduled completion of asset enhancement initiatives (AEIs) at KIPMALL Bangi in Feb-24 and KIPMall Senawang in Sep-24, we expect KIPREIT's occupancy rates to maintain strength and possibly achieve new highs.

Exciting Inorganic Growth Prospects

We foresee exciting inorganic growth prospects for KIPREIT as it aims to increase the portfolio's value to RM1.5bn over the next five years from its current RM1.0bn. With the recent addition of KIPMall Kota Warisan, KIPREIT still has two Right of First Refusal assets from its sponsor, namely KIP Mall Desa Coalfields and KIP Mall Kuantan. We understand that the management is actively pursuing strategic initiatives to nurture and enhance these assets, intending to inject them into KIP REIT as they mature.

Additionally, KIPREIT is actively seeking third-party retail assets and exploring opportunities in the industrial properties space. Given its healthy balance sheet and a gearing ratio of 32.3%, which offers RM350mn in debt headroom for AEIs and acquisitions, we are optimistic about KIPREIT's capacity to effectively execute its growth plans.


Maintain FY24-26 Earnings Forecasts.


KIPREIT is currently trading at a CY25f distribution yield of 8.6%, indicating a favourable spread of +463 basis points to the 10-year Malaysian Government Securities (MGS) yield, which stands at 3.97%. This appealing yield spread, alongside KIPREIT’s resilient portfolio performance, render its 8.6% yield particularly compelling, especially compared to MREIT’s average CY25 distribution yield of 6.8%.

Rolling forward our valuation base year to CY25, we arrive at a new TP of RM1.14/share (previously RM1.08/unit), based on an unchanged target yield of 6.75%. Reiterate Buy.

Source: TA Research - 18 Apr 2024

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