Steady top-line to remain. Single-digit reversions are expected despite the challenging market conditions, while portfolio occupancy remained stable at 91.4% vs. 86.3% in 1QFY19. We like the fact that six out of KIPREITs seven assets are located outside the Klang Valley, shielded from retail oversupply concerns, and close to major residential catchments. This coupled with the fact that KIPREIT’s tenants sell daily staple products (i.e. supermarkets, fresh markets, F&B and home products), ensures resilient shopper traffic to the malls, safeguarding tenants against economic fluctuations. FY20-21 will see 48-49% of NLA expiring which is heavy but management is confident as they have already confirmed 70% of NLA expiring in FY20 on low single-digit reversions.

Margins to improve gradually over the longer run on cost saving initiatives from the introduction of solar panels which is estimated to save utility cost by RM100k/month (full-year saving of RM1.2m p.a. in FY20) post installation completion in Jan 2019. Additionally, KIPREIT will also see lower financing cost post launching its Medium Term Note (MTN) Programme of up to RM2b for a perpetual basis at a lower rate of 4.6% p.a. vs. previous borrowing rate of 5.3% p.a. (conventional term loan). As such, we are expecting RNI margins of 49% In FY20-21 vs. 48% currently, which could even exceed 50% post FY21.

Targeting to acquire RM650m worth of assets over the next 5 years. New acquisitions will likely be from third parties in the retail segment, targeting NPI yield of 7% vs. its portfolio yield of 7% currently. Given the tough cap rate environment, KIPREIT is eyeing single tenanted retail assets in smaller towns to ensure acquisitions are DPU accretive. KIPREIT may utilise a combination of debt and equity funding for upcoming acquisitions, as current gearing of 0.36x is close to its internal gearing limit of 0.40x. KIPREIT could borrow an additional RM50m before hitting its internal gearing limit, or up to RM230m before hitting MREITs’ maximum gearing limit, assuming 100% debt funding scenario. As such, KIPREIT would likely have to utilise a combination of debt and equity funding for future acquisitions.

Expect RNI of RM37.9-38.2m in FY20-21E post accounting for fullyear contribution from AEON Kinta City Mall in FY20, on stable occupancy and low single-digit reversions. We are comfortable with our estimates as the bulk of FY20 expiries have been secured while the outlook going forward is fairly stable as KIPREIT’s tenants operate in the resilient market segment offering daily staple goods. FY20-21E GDPU of 7.1-7.2 sen implies 8.2-8.3% gross yield vs. MREITs under our universe average gross yield of 5.7%.

Trading Buy with a FV of RM1.10. We apply a +3.2ppt spread to our 10-year MGS target of 3.40%, higher than applied spreads for large cap retail MREITs under our coverage (+1.3 to +2.6ppt) which typically carry a premium (i.e. thinner spreads) for its reputable asset quality, tenant retention capabilities allowing for better rental reversions from high-end tenants, larger market cap size and more spread-out lease expiries. However, we believe our valuations are conservative given expectations of positive earnings growth from the recent acquisition, and stable reversions. Current gross yield of 8.2% is attractive while we believe the stock is undervalued trading at a 16% discount to its BVPS.

Source: Kenanga Research - 31 Dec 2019