REITS - A More Attractive Yield Play; U/G to OVERWEIGHT

Date: 
2024-10-04
Firm: 
RHB-OSK
Stock: 
Price Target: 
1.92
Price Call: 
BUY
Last Price: 
1.84
Upside/Downside: 
+0.08 (4.35%)
Firm: 
RHB-OSK
Stock: 
Price Target: 
2.11
Price Call: 
BUY
Last Price: 
1.75
Upside/Downside: 
+0.36 (20.57%)
  • Upgrade to OVERWEIGHT from Neutral; Top Picks: Sunway REIT (SREIT), Axis REIT (AXRB). With the US Federal Reserve (US Fed) beginning to cut interest rates in September – generally favourable for REITs – we think this is the catalyst needed to attract attention back to Malaysian REITs. The sector may become more vibrant with more REIT listings and new asset acquisitions. Overall, with limited downside risks for REITs under our coverage (M-REITs), we prefer those with inorganic growth prospects to drive DPU growth – SREIT and AXRB.
  • Upside from wider yield spread. While we expect Bank Negara Malaysia (BNM) to keep the overnight policy rate (OPR) at 3%, we think M-REITs would still benefit from the expected interest rate cuts globally. Due to the narrowing rate differential between Malaysia and other countries, this would drive capital into Malaysian bonds, exerting downward pressure into Malaysia bond yields. Currently, despite the 9% YTD appreciation of the KL REIT Index, the yield spread is at +1SD from its the historical mean (220 bps). Backed by solid fundamentals, we think this affords M-REITs further upside potential.
  • More conducive environment for asset acquisitions. Over the medium term with lower cost of borrowings, M-REITs may see more inorganic growth opportunities ahead. KLCCP Stapled (KLCCSS), the largest REIT in the country, has expressed its intention to acquire more buildings, a strategy similarly shared by Sunway REIT as part of its Transcend 2027 target. We also keep an eye out on IGB REIT potentially acquiring Mid Valley Southkey Mall as the mall is well into its second rental cycle, on top of the long-term growth prospects in Iskandar Malaysia with strong SGD spending power to fuel consumption in the state.
  • New REIT listings could garner interest in the sector. The proposed injection of c.MYR2.4bn of assets into a newly formed REIT for its upcoming listing is a positive for the sector. We think the trend should continue as more companies with a pool of investment properties consider monetising their assets in a lower interest rate environment. IOIPG (IOIPG MK, NEUTRAL, TP: MYR2.15) and SP Setia (SPSB MK, BUY, TP: MYR1.72) are the developers that have shared their intention to the market to list their investment properties as REITs.
  • Top Picks: SREIT, AXRB. Both REITs will likely see better growth outlook. Besides the solid backing from its sponsor Sunway (SWB MK, BUY, TP: MYR5.00) that could ensure a sustainable asset pipeline, we like SREIT for its robust earnings outlook, underpinned by a diversified portfolio and active acquisition strategy. We also like AXRB as a proxy to the resilient industrial property segment, especially as the REIT has picked up the pace in new acquisitions this year. Both REITs are likely to own data centre assets in the future.

Source: RHB Securities Research - 4 Oct 2024

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