Sector Update

06 October 2020

MREITs NEUTRAL
Sticking to Conservative Valuations ↔
By Marie Vaz / msvaz@kenanga.com.my

Maintain NEUTRAL. The sector came away from one of the worst quarters in MREIT’s history given
the effect of the MCO, primarily on retail and hospitality’s earnings as malls had to give tenants rental
rebates or waivers during the period while hotels had to halt operations. 2QCY20 results were a mixed
bag with safe havens being the stable industrial segment (AXREIT) which was our top performer, up
22% YTD, and the office segment (KLCC) as both posted results that came in as expected, while
MQREIT’s results were better than anticipated as its tenants remained stable. Going forward, we
expect to see better days ahead as 3QCY20 should see improved earnings post MCO, but we remain
cautious on 4QCY20 for now, barring any unfortunate events. Assuming a worst-case scenario
prompting another round of MCO, we may look to lower earnings for retail MREITs by 3 -10% assuming
another 1.5 months of MCO. We maintain our +2SD spread to our 10-year MGS target of 2.80% as we
are wary on the recovery path to the new normal, while AXREIT commands +1SD to the MGS target for
its stable earnings profile and KLCC at +1.5SD as it is largely office-space driven. All in, MREITs are
commanding an average gross yield of 5.9%, which we deem as decent. KLCC (OP; TP:RM8.55) is our
Top Pick given its: (i) earnings resiliency, (ii) premium asset quality, (iii) highly stable office segment
with tenants on long-term leases, (iv) easy to manage triple-net-lease (TNL) structure, and (v) Shariah-
compliance’s status making it one of institutional investors’ favourites, commanding decent gross
yields of 4.7%.

A mixed bag of results with two within expectations, namely AXREIT and KLCC, three
broadly within expectation (CMMT, IGBREIT and PAVREIT), one outperformer (MQREIT) and
one underperformer (SUNREIT). YoY-Ytd, MREITs’ bottom-line declined by 27% dragged by
the weak 2QCY20 in light of MCO which affected the retail and hospitality sectors the most.
On a positive note, the office and industrial segments remained stable throughout the
pandemic. All in, post 2QCY20 results, we made no changes to our earnings estimates, save
for MQREIT (+22%/+3% for FY20E/FY21E) on better-than-expected results, while we lowered
SUNREIT’s FY21E CNP by 5% on anticipation of further weakness from the hotel segment.
Subsequently, we also increased TP on a lower MGS target of 2.8% (from 3.3%), closer to
current level.
AXREIT the top gainer YTD, up 22%, on stable earnings even during the weak 2QCY20 results as the Group did not endure
lower rentals as there is no force majeure clause for tenants. Office REIT - KLCC’s performance came in second (-1% YTD) as
KLCC’s office assets were also fairly stable during the first three months of MCO as most tenants stayed put, albeit with some
concerns from its retail component Suria KLCC. The retail and hospitality segments were the most affected as tenants were not
allowed to operate during the MCO and struggled during subsequent MCO phases, resulting in share prices declining by
between 4% to 38%.
MREITs Share Prices YTD Gains/ Losses (%)

MREITs YTD Gains/ Losses (%)

CMMT MK Equity

MQREIT MK Equity

SREIT MK Equity

PREIT MK Equity

IGBREIT MK Equity

KLCCSS MK Equity

AXRB MK Equity

-50.0% -40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0%

Source: Bloomberg, Kenanga Research

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MREITs Sector Update
06 October 2020

Office and Industrial REITs are safer havens for now, while retail and hospitality could be risky should the situation
worsen. The retail segment was severely affected in 2QCY20 as malls were shut during the peak of the MCO, save for
essential businesses that make up c.10-15% of the mall. However, the segment that took the biggest hit was the hospitality
industry as most hotels were not allowed to house any guest or hold events from the MCO till May 2020. The bright spot was the
industrial segment that has been doing well during the MCO and post MCO as most manufacturing tenants remain in
operations. Meanwhile the office segment will continue to remain stable, namely KLCC and MQREIT as tenants have returned
to work or have the option to utilise work-from-home arrangement, ensuring that businesses continuity. We will only be
concerned with the office space on a prolonged MCO (> 6 months) which may impose cash flow pressure on tenants.
3QCY20 should see improved earnings. Given that most malls under our coverage have resumed operations in June/July
2020, we are confident that 3QCY20 earnings will see an uptick vs. 2QCY20. As such, we expect positive momentum for
earnings for now, barring any unforeseen circumstances. However, recent sporadic Covid-19 positive cases in a few malls in the
Klang Valley which included Suria KLCC and Sunway Pyramid is a cause for concern and as such we are cautious on 4QCY20.
That said, these malls adhere to the MCO guidelines and we do not expect business to be impacted by this for now. However,
assuming a worst-case scenario where the Covid-19 situation in the Klang Valley worsens in the coming months prompting
another round of MCO similar to the March-April period, we may look to lower earnings for retail MREITs by 3-10% assuming a
1.5-month MCO. For now, we leave earnings unchanged until further developments but we have priced the earnings uncertainty
in our conservative valuations.
MREITs Valuations
MRE IT Las t G DPS FY G ros s Targ et G ros s 10-yr New New Old Old S hare Total
Price as (RM) Yield G ros s yield MG S C all TP C all TP price Returns
at bas ed Yield s pread targ et (RM) (RM) ups ide/ (%)
25/09/20 on las t to 10-yr downs ide
price MG S (%)
KLC C 7.77 0.37 FYDec21E 4.7% 4.3% 1.5% 2.80% OP 8.55 OP 8.55 10% 15%
S UNRE I 1.60 0.08 FYJ un21E 4.7% 5.3% 2.5% 2.80% MP 1.45 MP 1.45 -9% -5%
T
C MMT 0.62 0.05 FYDec21E 8.2% 8.2% 5.4% 2.80% MP 0.625 UP 0.65 0.8% 8%
AXRE IT 2.16 0.10 FYDec21E 4.5% 4.5% 1.7% 2.80% MP 2.15 MP 2.35 0% 4%
PAVRE IT 1.56 0.08 FYDec21E 5.3% 5.1% 2.3% 2.80% MP 1.60 MP 1.50 3% 7%
IG BRE IT 1.84 0.09 FYDec21E 5.0% 5.1% 2.3% 2.80% MP 1.80 MP 1.65 -2% 2%
MQRE IT 0.76 0.07 FYDec21E 8.9% 8.6% 5.8% 2.80% OP 0.80 OP 0.80 5% 13%
Source: Bloomberg, Kenanga Research
Maintain NEUTRAL. We reiterate our neutral call on the sector upon maintaining conservative valuation spreads of +1SD to
+2SD to our 10-year MGS target of 2.80% (which is more conservative than current MGS level of 2.70%). As it stands, MREITs
are not entirely out of the woods with the re-emergence of Covid-19 positive cases in the Klang Valley. In the near term, we
expect 3QCY20 earnings to see significant improvements vs. 2QCY20 post the easing of the MCO but we remain cautious on
4QCY20 should the situation worsen going forward. As such, we have updated our retail MREITs to be valued at +2SD; KLCC
at +1.5SD given that it mostly consists of the stable office segment, while AXREIT has the lowest spread (+1SD) due to its
stable industrial segment. All in, we lowered our TP for CMMT and PAVREIT marginally post updating our spread of +2SD.
Additionally, we also upgrade our call for CMMT to MP (from UP) given the steep share price decline (-22% QoQ).
KLCC our Top Pick (OP: TP:RM8.55). We favour KLCC for its premium asset quality, highly stable office segment with tenants
on longer term leases (5 years vs. retail of 2-3 years) and easy to manage triple-net-lease (TNL) structure. Its 1HFY20 results
were decent, making up 47% of our earnings estimates thus far despite the MCO effect in 2QCY20, and we anticipate stronger
quarters ahead post the easing of the MCO. As such we believe potential downsides to earnings have largely been accounted
for, including conservative valuations. We have applied +1.5SD spread to our 10-year MGS target of 2.80% (range bound
between retail MREITs of +2SD and more stable industrial MREITs at +1.0SD). Furthermore, downside is limited and we expect
KLCC to remain a favourite among institutional investors as it is one of the few Shariah-compliant MREITs. Current yields of
c.4.7% are decent vs. large cap MREITs of 4.5-5.0%, commanding 15% total return.
Risks to our call include: (i) stronger or weaker-than-expected consumer spending, (ii) stronger or weaker-than-expected rental
reversions, (iii) U.S. Fed’s move in increasing or lowering interest rates in an aggressive manner, and (iv) stronger or weaker-
than-expected occupancy rates.

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 MREITs Sector Update
06 October 2020

Peer Comparison
Last Net
Core Earnings
Name Price Market Shariah Current Revenue Growth PER (x) - Core Earnings PBV (x) ROE (%) Div.Yld. Target Rating
Growth
(25/9/20) (%)
Cap 1-Yr. 2-Yr. 1-Yr. 2-Yr. 1-Yr. 2-Yr. 1-Yr. 1-Yr. 1-Yr. Price
(RM) Compliant FYE Hist. Hist.
(RM'm) Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. (RM)

STOCKS UNDER COVERAGE

AXIS REIT 2.16 3,115.4 Y 12/2020 1.8% 6.1% 12.2% 8.7% 26.9 24.1 22.2 1.5 1.5 6.2% 3.7% 2.15 MP
CAPITALAND
MALAYSIA MALL 0.620 1,274.3 N 12/2020 -17.7% 15.2% -45.4% 49.4% 10.0 18.2 12.2 0.5 0.5 2.6% 5.0% 0.625 MP
TRUST
IGB REIT 1.84 6,545.1 N 12/2020 -20.0% 22.1% -14.4% 24.2% 20.7 27.9 22.0 1.7 1.8 6.2% 3.6% 1.80 MP
KLCCP STAPLED
14,027.4 Y 12/2020 -3.7% 3.5% 5.4% 8.55 OP
GROUP 7.77 -7.8% 3.8% 19.4 21.0 19.9 1.1 1.1 0.9%
MRCB-QUILL REIT 0.760 814.6 N 12/2020 -4.2% 2.6% -11.4% 4.5% 9.9 11.2 10.8 0.6 0.6 5.3% 8.4% 0.800 OP
PAVILION REIT 1.56 4,750.7 N 12/2020 -12.0% 15.9% -38.8% 59.6% 19.2 31.3 19.7 1.2 1.2 3.8% 3.1% 1.60 MP
SUNWAY REIT 1.60 4,712.1 N 06/2021 1.5% 12.2% -10.5% 24.4% 16.7 18.6 15.9 1.1 1.0 5.4% 4.4% 1.45 MP
Simple Average -7.8% 11.1% -16.6% 24.9% 17.5 21.8 17.5 1.1 1.1 5.0% 4.2%

Source: Bloomberg, Kenanga Research

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MREITs Sector Update
06 October 2020

KLCC – Fwd PER Band KLCC – Fwd PBV Band

Source: Kenanga Research

PAVREIT – Fwd PER Band PAVREIT – Fwd PBV Band

Source: Kenanga Research

SUNREIT – Fwd PER Band SUNREIT – Fwd PBV Band

Source: Kenanga Research

AXREIT – Fwd PER Band AXREIT – Fwd PBV Band

Source: Kenanga Research

PP7004/02/2013(031762) Page 4 of 6
MREITs Sector Update
06 October 2020

IGBREIT – Fwd PER Band IGBREIT – Fwd PBV Band

Source: Kenanga Research

CMMT – Fwd PER Band CMMT – Fwd PBV Band

Source: Kenanga Research

MQREIT – Fwd PER Band MQREIT – Fwd PBV Band

PRICE (RM) PER 9.8 x PER 11.5 x PER 13.2 x PER 14.9 x PER 16.6 x FWD PBV S.Dev +2 S.Dev +1.5 S.Dev +1 S.Dev 0.5

2.20
S.Dev -0.5 S.Dev -1 S.Dev -1.5 S.Dev -2 FWD AVG PBV
1.10
2.00

1.00
1.80

1.60 0.90

1.40
0.80
1.20

0.70
1.00

0.80 0.60

0.60
0.50
09 10 10 -1
1
-1
1
-1
2
-1
2 13 14 14 15 -1
5 16 17 17 -1
8
-1
8
-1
9
-1
9 20
n- n- g- ar ct ay ec
l- b- p- r-
ov n- n- g- ar ct ay ec
l-
Ju Ap Ju
10

11

12

13

14

15

16

17

18

19
11

12

13

14

15

16

17

18

19

Ju Ja Au M O M D Fe Se N Ju Ja Au M O M D 20
c-

c-

c-

c-

c-

c-

c-

c-

c-

c-
n-

n-

n-

n-

n-

n-

n-

n-

n-

n-
De

De

De

De

De

De

De

De

De

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Ju

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Ju

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Ju

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Source: Kenanga Research

PP7004/02/2013(031762) Page 5 of 6
MREITs Sector Update
06 October 2020

Stock Ratings are defined as follows:

Stock Recommendations

OUTPERFORM : A particular stock’s Expected Total Return is MORE than 10%

MARKET PERFORM : A particular stock’s Expected Total Return is WITHIN the range of -5% to 10%
UNDERPERFORM : A particular stock’s Expected Total Return is LESS than -5%

Sector Recommendations***

OVERWEIGHT : A particular sector’s Expected Total Return is MORE than 10%

NEUTRAL : A particular sector’s Expected Total Return is WITHIN the range of -5% to 10%
UNDERWEIGHT : A particular sector’s Expected Total Return is LESS than -5%

***Sector recommendations are defined based on market capitalisation weighted average expected total
return for stocks under our coverage.

This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not
make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to
the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This
document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees.
Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document
or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or
employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or
otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies.

Published and printed by:

KENANGA INVESTMENT BANK BERHAD (15678-H)

Level 17, Kenanga Tower, 237, Jalan Tun Razak, 50400 Kuala Lumpur, Malaysia
Telephone: (603) 2172 0880 Website: www.kenanga.com.my Email: research@kenanga.com.my

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