• We initiate coverage on Al-Salam REIT (ALSREIT) with a BUY rating and a Dividend Discount Model (DDM) target price (TP) of RM0.46 (Cost of Equity: 6.8%, Terminal Growth Rate: 1%).
• We expect ALSREIT’s realised net profit to grow at a 3-year CAGR of 14% over 2023-2026F, driven by recovery in rental rates and higher occupancy rates from its diversified asset base, particularly in Johor Bahru.

• ALSREIT has consistently rewarded its shareholders above its 90% payout policy. For 2024F/25F/26F, we expect ALSREIT to declare a dividend per unit (DPU) of 1.53sen/1.66sen/1.84sen, respectively.

Revenue is Expected to Recover to Pre-Pandemic Level in 2026F

We expect that Al-Salam REIT (ALSREIT)'s revenue to grow at a 3-year CAGR of 5% from 2023 to 2026F reaching RM88.4mn This growth will be primarily driven by improved performance in the retail segment particularly from KOMTAR JBCC. We anticipate significant rental growth beginning in 2025F, driven by management's efforts to increase KOMTAR JBCC's occupancy rate to around 80%. Besides, we expect the average rental rate to increase to RM5.97/sq.ft and RM6.39/sq.ft in 2025F and 2026F, respectively from current rental rate of RM5.63/sq.ft. This will be supported by its strategic location, which is among the key beneficiaries when the RTS begins operation. This is expected to improve footfall traffic and subsequently reflect in tenant sales, especially for tenants under gross turnover rental (GTO) agreements.

Maintain a Payout of Over 90% Despite the Challenging Market

REITs are required to distribute at least 90% of its taxable income. During the pre-COVID period from 2015 to 2019, ALSREIT consistently paid distributions ranging from 96% to 99%. In 2023, despite higher financing costs, ALSREIT paid out 92% of its distributable income with a distribution yield of 2.53%. This reflected a weaker revenue and net income performance during that period. As revenue momentum is expected to recover to pre-COVID levels by 2026, we anticipate an improvement in payout ratios. Based on our forecast payout of 95%, we project ALSREIT to declare a DPU of 1.53sen/1.66sen/1.84sen for 2024F/25F/26F, respectively.

Initiate Coverage with a BUY; TP of RM0.46

We initiate coverage on ALSREIT with a BUY recommendation and a target price (TP) of RM0.46. We derive our fair value based on Dividend Discount Model (DDM) valuation (Cost of Equity: 6.8%, Terminal Growth Rate: 1%)

Source: BIMB Securities Research - 13 Jan 2025