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HLIB foresees continuous, steady recovery for Malaysian REITs

KUALA LUMPUR (April 13): Hong Leong Investment Bank (HLIB) Research has maintained its "neutral" rating of Malaysian real estate investment trusts (REITs) following relaxation of the movement control order (MCO). 

In a sector update today, HLIB said REIT companies in its universe are estimated to have an average yield of 5.1% for financial year 2021 (FY21).

HLIB analyst Farah Diyana Kamaluddin said progressive relaxation of interstate travel restrictions would aid the recovery in hotel occupancy rates, with pent-up consumption and festive season spending (Hari Raya) aided by easing of restrictions contributing to a sustained improvement in the retail sector. The ongoing 10% electricity tariff rebate (until June 2021) would aid in reducing operating cost.

The analyst said HLIB is optimistic about a steady recovery for both the retail and hotel segments (driven by relaxation of the MCO).

"Separately, we believe the office and industrial segments will continue to remain stable," she said.

She said as the economy slowly recovers, in addition to the vaccine roll-out plan, she expects more employees to gradually return to the office with fewer working from home (WFH).

"On that note, we expect demand for office space to remain resilient for the rest of the year. Meanwhile, for industrial REITs, the segment has been steady all along, backed by exceptional growth of the e-commerce sector seen during the [Covid-19] pandemic.

"As online shopping becomes the new norm, it has created a strong tailwind for warehousing and logistics companies. Hence, we believe industrial REITs will continue their stability and growth trajectory in 2021," she said.

Farah explained that Malaysian Government Securities' (MGS) yield had been on the rise since February, currently at 3.1% (highest year-to-date [YTD]: 3.48%).

"On the other hand, the yield spread between REITs under our coverage and the 10-year MGS is currently at 306bps (basis points), which is around +1SD (standard deviation) of the five-year mean of 340bps. To keep abreast with the current 10-year MGS yield, we take the opportunity to increase our average MGS assumption to 3.25% (from 3%) versus the current level of 3.1% (YTD average: 3%), implying around +0.75SD of the five-year mean.

"Also, we recompute our two-year historical average yield spread from 2019-2020 (instead of 2018-2019), and roll forward our valuation to FY22," she said.

Her top pick is AXIS REIT, with a target price (TP) of RM2.48, with strong resiliency throughout the Covid-19 pandemic driven by increased popularity of its industrial properties, high occupant tenancy in its diversified portfolio and also with it being one of the few syariah-compliant REITs.

At the time of writing today, shares in AXIS REIT were unchanged at RM1.92, valuing the counter at RM2.77 billion. Shares in IGB REIT were also unchanged at RM1.78, valuing the counter at RM6.344 billion. KLCC Property Holdings Bhd and KLCC REIT (KLCCP Stapled Group) too remained unchanged at RM7, with a market capitalisation of RM12.637 billion.

Shares in Pavilion REIT were also unchanged at RM1.43, bringing it a market capitalisation of RM4.358 billion. Shares in Sentral REIT too remained unchanged at 90.5 sen, giving it a market value of RM970 million.

On the other hand, Sunway REIT shares had fallen two sen or 1.29% to RM1.53, bringing it a market value of RM5.24 billion.

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