REITS - MGS Yield Expectation Raised

  • 10-Year MGS yield spiked, narrowing spread between M-REITs and 10-year MGS Yield
  • Raising our MGS yield assumption to 4.0% (from 3.75%)
  • Target prices for REITs revised lower as we tweak our MGS yield assumption lower
  • We remain NEUTRAL on the sector with Top Picks being SUNWAY REIT (BUY; TP: RM1.83) and CMMT (BUY; TP: RM1.69)
10-Year MGS yield spiked – MGS yield spiked in November to above 4.45% following the foreign funds outflow from emerging markets. Currently, MGS yield is hovering at 4.35%, above five years mean plus two standard deviations of 4.3%. The spike in MGS yield is negative to REITs due to narrowing spread between dividend yield of REITs and MGS yield which reduce attractiveness of REITs. Note that spread between dividend yield of REITs and MGS yield declined sharply in November, making it the thinnest spread in the past five years.

Our MGS yield assumption is now revised higher by 25bps to 4.0% - We are revising higher our MGS yield assumption by 25 basis points to 4.0% from 3.75% in view of high likelihood of Federal Reserve raising interest rate which would keep MGS yield volatile going forward. Our new MGS yield assumption of 4% is close to five years mean plus one standard deviation of 4.1%.

Target prices for REITs revised lower - We adjust our target prices for REITs under our coverage following the revision of MGS yield which translates into higher discount rate in our Dividend Discount Model (DDM) valuation. Target price (TP) for Axis REIT has been revised downwards by 2.3% to RM1.68 (from RM1.72); CMMT TP revised downwards by 1.7% to RM1.69 (from RM1.72); IGB REIT TP revised downwards by 2.4% to RM1.63 (from RM1.67); KLCCP Stapled Group TP reduced by 1.9% to RM7.16 (from RM7.30); Pavilion REIT TP revised downwards by 2.3% to RM1.68 (from RM1.72); and Sunway REIT TP reduced by 1.6% to RM1.83 from RM1.86. Overall, the decline in Target Prices has been minimal and our recommendations remain intact.

Maintain Neutral on REITs sector - Outlook for retail sector in Malaysia is expected to show marginal improvement in 2017 as we see that consumer sentiment should have bottomed out in 2015. In this context, we expect slightly better outlook for retail sales in Malaysia which should underpin rental reversion for retail segment to remain in positive territory. Meanwhile, we opine that office segment of Malaysia property market will continue to be tenants’ market due to the oversupply of office space which render limited upside to rental reversion. Overall, we maintain our Neutral rating on REITs sector.

Top Picks are SUNWAY REIT (BUY; TP: RM1.83) and CMMT (BUY; TP: RM1.69) – We like SUNWAY REIT as we are positive on its retail division which would mainly underpin by resilient performance of its flagship Sunway Pyramid Shopping Mall while its office division should see recovery in FY17 from the low base in FY16. As for CMMT, we continue to see positive earnings outlook which would be driven by the steady performance from Gurney Plaza and East Coast Mall. We also opine that earnings downside risk from Sungei Wang Plaza (SWP) is limited as SWP has become the smallest earnings contributor to CMMT in 9MFY16 at 12% as compared to contribution of 19% in FY15 and 27% back in FY13 following steep earnings contraction in the past few years.
We are NEUTRAL on KLCCP Stapled Group (TP: RM7.16), Axis REIT (TP: RM1.68), Pavilion REIT (TP: RM1.68) and IGBREIT (TP: RM1.63).
Source: MIDF Research - 5 Dec 2016