- We have downgraded the REIT sector to a NEUTRAL, strictly
because distribution yields have compressed significantly, making M-REIT much
more expensive than S-REIT.
(1) CapitaMall Trust Malaysia (HOLD, FV:
RM1.68/unit): We downgrade CMMT to a HOLD, with an unchanged fair value of
RM1.68/unit. At the current price of RM1.60/unit, distribution yield is
compressed to 5%. Even though we continue to like CMMT’s medium growth
trajectory, we do not see much room for yield to compress further. For
comparison, CMMT’s sister company, CapitaMall Trust Singapore, is trading at a
more attractive yield of 5.4%, based on the latest trading price of
SGD1.90/unit. This is despite having a lower Singapore risk free rate than
Malaysia’s. Given its well-diversified and strategically located quality retail
portfolio and strong parentage, the re-rating catalysts in the short-medium
term will be driven by a retail mall freeze in Penang and upcoming MRT station
in Jalan Bukit Bintang.
(2) Pavilion REIT (HOLD, FV: RM1.33/unit): We
also downgrade P-REIT to a HOLD, with an unchanged fair value of RM1.33/unit
mainly for the same reason as CMMT. Distribution yield have compressed to 5% at
the current price of RM1.26/unit from 5.4% previously. Nonetheless, more
tangible earnings are anticipated from the potential acquisition in the
pipeline – Fahrenheit, Pavilion Extension and USJ mall. Additionally, the
upcoming MRT station in Jalan Bukit Bintang will lift footfall for Pavilion
Mall. Hence, we envisage a stronger earnings trajectory in the near term due to
the exposure in prime retail assets and upcoming asset injections.
(3) Al-‘Aqar
Healthcare REIT (HOLD, FV: RM1.39/unit): We are maintaining our HOLD, with
an unchanged fair value of RM1.39/unit. Distribution yield stands at 5.5% at
current price of RM1.40/unit. We do see room for earnings revisions in the near
term underpinned by the right of first refusal to a pool of KPJ Healthcare’s
hospitals and management is on an active look-out for third party acquisitions
in aged-care and retirement villages. Nonetheless, we still continue like CMMT
and P-REIT over the medium to longer term.
- Significant compression in distribution yields: By
historical standard, M-REIT is expensive given the current distribution yield
compression to 5% vis-a-vis 7%-8% previously. Yields of CMMT and P-REIT are 5%,
which is lower than CapitaMall Trust Singapore and Frasers Centrepoint at 5.4%
and 5.7%, respectively. On a 5 year average, the 10-year Singapore Government
bond of 2.7% is lower than the 10-year MGS of 3.9%. Furthermore, the spread of the 10-year MGS
for M-REITs has narrowed to 150bps. This is even tighter than the current
spread in the S-REIT of 380bps. The narrowing of spread suggests that
valuations of M-REIT are high. Not forgetting, the risk free rate in Singapore
at 1.6% is lower than the 10-year MGS of 3.5%. As such, M-REIT is more
expensive than S-REIT.
- Flipside of distribution yield compression: On the
flipside, the compression in yield may lead to more active acquisitions because
of greater scope of accretion. Furthermore, inflation has more than halved to
1.7% in June 2012. This may either accentuate the current low interest rate
regime (3.3%) or potentially cut interest rate if the economy decelerates.
Given weak inflation, this would provide downside support, notwithstanding the
lofty valuation underpinned by yield compression. Our conversations with
managements suggest acquisition to gain momentum by M-REITs. The potential
lower hurdle rates make acquisition more attractive based on a lower cost of
funding. In the near term, we expect
REITs to trade sideways due to its rich valuation at least until more accretion
in distribution yields arising from acquisitions.
- Increasing representation of M-REIT: Market capitalisation
of the 13 M-REITs stand at RM26bil. Reported yield of the upcoming listing of
IGB REIT is at 5.5%, estimated at RM4bil-RM4.5bil, bringing market
capitalisation to circa RM30bil (+15%). There has also been recent talk of KLCC
Property looking at a REIT for its asset in the near term. The listing of a
such large REIT will more than broaden and lift the sector as well as
progressively develop it as a distinct asset class.
Source: AmeSecurities
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