Sector Remains Attractive; Accumulate On Weakness
The sector has outperformed the FBMKLCI ytd (+5% vs -1.9%). With 1Q22 recording
encouraging results, we expect the sector to continue to be resilient and fully
recover back to pre-pandemic levels in 2023. Office REITs offer higher stable yields,
followed by retail REITs, which will be boosted by the earnings recovery especially
when more international tourists come in. Maintain OVERWEIGHT. Top picks:
Sunway REIT, IGB REIT and Sentral REIT.
WHAT’S NEW
• 1Q22 results round-up: Within our expectations. Out of the seven REITs in our coverage,
five were within expectations, while two were above our expectations. Earnings improved 3%
qoq and 51% yoy as the country is transitioning into endemic phase. Tenant sales also
recovered to pre-pandemic levels since Dec 21, while footfall is at about 80%, indicating that
business is as usual. Having said that, we expect the sector to deliver 36% earnings growth
in 2022 (96% of 2019 earnings), on the back of tapering rental assistance.
• Earnings recovery to overcome rate hike impact. Although any rate hike is negative to the
sector, we opine that the impact would be manageable given the REITs’ healthy gearing
levels and earnings recovery. This has been proven in their latest 1Q22 results where footfall
and tenant sales continued their momentum since 4Q21, with earnings appreciating 3% qoq.
Even as the overnight policy rate (OPR) has increased by 25bp on 11 May, share prices
remained resilient, having appreciated 2-9% since in mid-April.
• Moreover, the sector’s yield spread to 10-year Malaysian Government Securities (MGS) is
close to mean at 1.9ppt. With the current concerns of stagflation in key developed economies
globally, we are not expecting MGS to rise materially from current levels. Hence, investors
may turn to REITs as they are naturally defensive and have attractive yields of at least 5%.
ACTION
• Outperforms FBMKLCI ytd; accumulate on weakness. Share prices have appreciated 5%
ytd on average (-2% since 2021, -14% since 2020), outperforming the FBMKLCI (-1.9% ytd).
The outperformance has proven that high-dividend yielding stocks like REITs remained
resilient, in addition to the still-attractive yields of at least 5%. REITs’ attractive yields of at
least 5% are sustained by the earnings recovery and further boosted by the border
reopening.
• Maintain OVERWEIGHT. Malaysian REITs still command attractive yields compared with
fixed income instruments. We prefer the retail segment, particularly prime/niche malls for
their proven business resilience. Our sector BUY calls are Axis REIT, IGB REIT, KLCCSS,
Pavilion REIT, Sentral REIT and Sunway REIT. Our top picks are Sunway REIT (border
reopening recovery), Sentral REIT (high and resilient yields of 7-8%), and IGB REIT (fasterthan-peers’ recovery pace).