MIDF positive on REITs' earnings prospects for 2H2024 amid bright retail, industrial outlook

• "Earnings for retail REIT will continue to be supported by positive rental reversion as the retail industry remains buoyant with strong shopper footfalls at malls," said MIDF, which has six REITs under its coverage.

KUALA LUMPUR (Sept 6): The earnings prospect for real estate investment trusts (REITs) in the second half of this year is expected to remain positive, due to the bright outlook for the retail industry and industrial segment in Malaysia, according to MIDF in a note on Friday.

"Earnings for retail REIT will continue to be supported by positive rental reversion as the retail industry remains buoyant with strong shopper footfalls at malls," said MIDF, which has six REITs under its coverage, including Pavilion REIT (KL:PAVREIT), IGB REIT (KL:IGBREIT) and Sunway REIT (KL:SUNREIT).

"Notably, we expect earnings of Sunway REIT to grow stronger in 2HCY2024 as the reconfiguration exercise of Sunway Pyramid Mall is progressively completed.

“Similarly, the industrial segment in Malaysia is well supported by the strong demand for industrial space in Malaysia," said the research house, which remained 'positive' on REITs.

The other three REITs under its coverage are Axis REIT (KL:AXREIT), KLCC Stapled Group (KL:KLCC) and Al-`Aqar Healthcare REIT (KL:ALAQAR).

The earnings performance of REITs under its coverage was positive in 1HCY2024, it noted, except for Sunway REIT and Al-`Aqar Healthcare REIT.

Sunway REIT recorded a marginal decline in 1HCY2024 earnings due to higher financing costs, while Al-`Aqar Healthcare REIT's earnings were also marginally lower due to higher expenditure and lower rental income from its Australian division.

In contrast, Axis REIT and Pavilion REIT recorded double-digit earnings growth during the period, while IGB REIT and KLCCP Stapled Group registered single-digit earnings growth, it said. 

It noted that the earnings of REITs under its coverage, particularly retail REIT, were lower in the second quarter due to seasonally shopper footfalls. Still, all six REITs reported commendable earnings growth on a yearly basis.

"The REIT with highest earnings growth in 2QCY2024 was Axis REIT (up 10% y-o-y) as its earnings were boosted by contributions from Bukit Raja Distribution Centre 2 and newly acquired assets. Sunway REIT reported 9.3% y-o-y earnings growth as the performance of its retail, hotel, office and other divisions was encouraging.

Similarly, earnings growth of IGB REIT was solid (up 8.9% y-o-y) due to positive rental reversion and high shopper footfall at Mid Valley Megamall and The Gardens Mall," MIDF noted.

The earnings of Pavilion REIT and KLCCP Stapled Group also remained steady, with Pavilion REIT seeing a y-o-y growth of 6.7% while KLCCP Stapled Group recorded a 5.7% y-o-y growth, it said.

Meanwhile, it noted that the average distribution yield of REITs under its coverage was 5.1%, which it deemed still attractive.

Its top picks for the sector were Sunway REIT (“buy”; target price [TP]: RM1.81) and Pavilion REIT (“buy”; TP: RM1.60).

"We remain positive on Sunway REIT as we see better earnings outlook for Sunway REIT beyond FY2025 due to stronger earnings contribution from retail division after the reconfiguration of Sunway Pyramid Mall is completed. Besides, its hotel division will benefit from the higher tourist arrival.

"Similarly, we also see stronger earnings prospects for Pavilion REIT as rental reversion outlook for Pavilion Mall KL remains positive while earnings contribution from Pavilion Bukit Jalil Mall will further support earnings growth," it added.

Sunway REIT closed unchanged at RM1.66 on Friday, for a market capitalisation of RM5.89 billion.

Also unchanged were Pavilion REIT at RM1.43, giving it a market capitalisation of RM5.24 billion; IGB REIT at RM2.04 for a market capitalisation of RM7.37 billion; and Al-`Aqar Healthcare REIT at RM1.31, for a market value of RM1.1 billion.

KLCC Stapled Group dipped three sen to close at RM7.86, for a market capitalisation of RM14.19 billion, while Axis REIT slipped two sen to RM1.77, valuing it at RM3.09 billion.

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