Al-Salam REIT’s 1QFY16 earnings below expectations

Al-Salam Real Estate Investment Trust (May 23, 97.5 sen)

Maintain buy with an unchanged target price (TP) of RM1.07: Al-Salam Real Estate Investment Trust’s (Al-Salam REIT) first quarter of financial year 2016 (1QFY16) earnings were below our expectations, mainly due to lower-than-expected occupancy rates and percentage rent income from the Komtar JBCC mall (pictured).

1QFY16 core net profit grew 7.5% quarter-on-quarter (q-o-q) to RM7.3 million, accounting for 21% of our previous FY16 estimate. Q-o-q earnings were largely driven by an improved occupancy rate at Komtar JBCC, and supported by steady revenue from KFCH International College and QSR Properties (with long-term and triple net leases respectively). 1QFY16 earnings, however, missed our estimates due to Komtar JBCC’s lower-than-expected occupancy rate, which was at 91% (end-1QFY16) compared with our average FY16 estimate of 93%, and a delay in percentage rent collection (as a temporary benefit for tenants). We understand that Komtar JBCC will commence its percentage rent structure soon.

We reduce our FY16 net profit forecast by 6% after imputing a lower average occupancy rate of 91.5% for Komtar JBCC (from 93%) and lower percentage rent income (half-year earnings impact). Our FY17 to FY18 estimates are intact. Komtar JBCC contributes a sizeable 52% of our FY16 revenue forecast.

We remain positive on Al-Salam REIT, premised on its favourable portfolio mix, which has earnings growth catalysts from Komtar JBCC, and stable, recurring income from KFCH International College and QSR Properties. Meanwhile, we understand that Al-Salam REIT is currently assessing a mixed asset (commercial and retail) for acquisition, which could lift its total investment property value above the RM1 billion mark (end-1QFY16: RM912 million).

We lower our FY16 earnings estimate by 6% after adjusting Komtar JBCC’s key assumptions. Our discounted cash flow-based TP of RM1.07 is unchanged, with the assumption that weighted average cost of capital is at 7.2%, with a terminal yield of 7%. — Maybank Investment Bank Research, May 23

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This article first appeared in The Edge Financial Daily, on May 24, 2016. Subscribe to The Edge Financial Daily here.