This article first appeared in The Edge Financial Daily on February 22, 2019
Al-Salam REIT
(Feb 21, 80 sen)
Maintain hold with a target price (TP) of 85 sen: Al-Salam REIT’s (ALSREIT) fourth quarter of 2018 (4Q18) core earnings was within our estimates. 4Q18 improved year-on-year (y-o-y) earnings were largely attributed to new assets’ contribution and higher rental income from selected properties. However, we lower our FY19-20 earnings forecasts by 9%-11% after factoring in the non-renewal of an anchor tenant in Komtar Johor Bahru City Centre (JBCC) at end-2018. Our discounted dividend model-target price (DDM-TP) of 85 sen is unchanged.
Excluding revaluation gains of RM6.8 million, 4Q18 core net profit grew 10% y-o-y and 24% q-o-q to RM9.4 million, bringing FY18 core earnings to RM31.9 million (-10% y-o-y) — meeting 99% of our full-year estimate. 4Q18’s y-o-y core net profit growth was mainly driven by: (i) full quarter rental income contribution from Mydin Hypermarket Gong Badak which was acquired on Sept 21, 2018 (contributed approximately 15% of ALSREIT’s 4Q18 revenue), and (ii) positive rental reversions at Menara Komtar (unchanged occupancy of 91%), KFCH College and QSR Properties.
However, 4Q18 core earnings were partly mitigated by: (i) lower rental income at Komtar JBCC (that is from rental rebates) despite having stable occupancy of 95% (unchanged y-o-y), and (ii) steeper financing costs due to higher borrowings.
We lower our FY19/20E earnings forecasts by 9%/11%, after imputing lower revenue and occupancy at Komtar JBCC. We note that Metrojaya Department Stores Sdn Bhd’s tenancy agreement was terminated on Dec 31 2018. The tenant contributed 3% of ALSREIT’s FY18 revenue and occupied about 32% of the mall’s net lettable area. Our 10% FY19 bottom-line growth estimate is mainly backed by new assets’ contributions: Mydin Hypermarket Gong Badak and 22 QSR Properties. We also introduce our FY21 forecast. Separately, we roll forward our DDM-valuation base year to FY19 from FY18; FY19-29E(estimate) deriving from an unchanged TP of 85 sen.
Therefore, we continue to favour ALSREIT’s assets which are on long-term and triple net leases, namely KFCH College, QSR Properties and Mydin Hypermarket Gong Badak which have lower occupancy risks and would provide resilient rental income to ALSREIT (29-30% of FY19-21E revenue). — Maybank IB Research, Feb 21