Regaining lost ground despite challenges
- 1HFY22 results were above expectations; earnings rebounded strongly yoy.
- Underperforming malls with negative rental reversion are key headwinds in 2H22F; new logistics asset acquisition provides diversification benefits.
- Hold rating and TP intact; revised 6.1-6.5% dividend yields are key support.
1HFY22 results above expectations; strong earnings rebound yoy
1HFY22’s overall performance was underpinned by the two festive periods in 1Q22 and 2Q22 – Chinese New Year (CNY) and Hari Raya. Retail sales were robust at 19% higher than the average pre-Covid 19 level, partially offsetting retail footfall, which stood at 22% below pre-pandemic levels (weak tourist numbers). Another key driver was that no rental assistance was provided in 1H22 (none guided for 2H22). All in, 1HFY22 core net profit was above expectations, at 55-61% of our and consensus full-year forecasts. Deviations were: 1) Stronger revenue – 52% of our full-year forecast, and 2) higher NPI margin of 53% vs. our full-year forecast of 50%, reflective of diminishing rental assistance. 2QFY22 core net profit soared 121% yoy (+15.5% qoq) on the back of higher revenue and higher NPI margin. 1HFY22 revenue grew 24.3% yoy while core net profit showed a strong yoy rebound (+108% yoy) to RM43.1m. 2Q22 DPU of 1 sen brings 1H22 DPU to 2 sen (58% of full-year estimate of 3.4 sen).
Pockets of challenges going into 2HFY22; ECM the star performer
Key headwinds into 2HFY22 can be deduced from 1HFY22’s portfolio performance: 1) Office occupancy rate declined due to tenancy non-renewal, 2) Sungei Wang Plaza, SWP, remained in losses (negative NPI), although negative rental reversion eased to -6.5% (1Q22: -12%), and 3) 3 Damansara Mall, which has been underperforming post lockdowns, slipped into losses (negative NPI), with a 51.3% occupancy rate and -33.7% rental reversion. Rejuvenation plans for 3 Damansara and replacement of anchor supermarket tenant (c.100k sq ft NLA) are ongoing. Some positives in 1HFY22 include improving portfolio occupancy rates, at 81% as at Jun 22 (79.5% as at Mar 22), while the recovery non-Klang Valley (KV) malls remains well ahead of those in KV. Rental reversion outlook in 2HFY22F is still tilted to negative territory, albeit narrower at -4.2% in Jan-Jun vs. -7.3% in Jan-Mar, thanks to East Coast Mall’s (ECM) +8% rental reversion. For FY22F, 35.2% of NLA is due for renewal (361 leases), with the majority at SWP and The Mines.
New logistics/warehouse asset a positive; Hold rating and TP intact
The recent RM80m acquisition of a logistics/warehousing asset in Penang was the group’s first step in realising its asset diversification plans; we estimate a gross rental income of RM6m p.a. We raise FY22-24F EPS/DPU by 14-20% to reflect stronger rental revenue and higher NPI margin. Retain Hold rating, supported by FY22-24F dividend yields of 6.1-6.5%. Our DDM-based TP is unchanged at RM0.59 (COE of 5%) as, despite the upgrades in DPU, we update for a higher adjusted beta. Upside risks: retail recovery and asset acquisition. Downside risk: weaker earnings and negative rental reversions.