This article first appeared in Capital, The Edge Malaysia Weekly on May 1, 2023 - May 7, 2023

Target price: RM1.57 BUY

RHB RESEARCH (APRIL 25): 1Q23 core profit of RM70.1 million is in line, at 23% of our full-year forecast and 25% of the street’s estimate. Revenue improved 7.3% quarter on quarter (q-o-q) from higher rental revenue recorded in the quarter following the seasonally strong Christmas festival. Year on year (y-o-y), turnover increased 12.7% due to higher occupancy rates. Interest expenses grew 4.1% q-o-q due to interest rate hikes. Despite higher property operating expenses stemming from the electricity tariff surcharge and higher spending for marketing campaigns, its net property income (NPI) yield was at a healthy 65%. Pavilion REIT’s distribution per unit (DPU) for the quarter amounted to 2.37 sen, the highest since an equal amount in 1Q19.

Following the strong momentum in 4Q22, Pavilion KL (PKL) drove revenue growth; PKL’s turnover rose 8.9% q-o-q from higher rental revenue collected. We believe tenant sales will be supported by a resilient domestic economy and the increasing number of tourists. Previously, management guided that 30% of PKL’s pre-pandemic footfall came from foreign tourists, with roughly 50% of that number coming from China. As such, the opening of China’s borders is expected to be another boost for the mall. In contrast, the REIT’s other malls recorded flattish q-o-q growth, with Pavilion Tower recording a 3.2% decline in revenue. Da Men Mall remained in the red, with a net property loss of RM2.51 million.

The acquisition of Pavilion Bukit Jalil (PBJ) is expected to be completed in 2Q23, following approval by unitholders in March 2023. We remain positive on the acquisition. The mall previously locked in low rental rates as it was opened during the pandemic, so this makes for opportunities to improve its single-digit rental reversion rate moving forward. The acquisition is also expected to be yield-accretive, with an NPI yield of 6.6% compared to Pavilion REIT’s 6% in FY22.

We make minor adjustments to our FY23-25 forecasts following the latest results and maintain our RM1.57 target price (TP). Our TP incorporates a 0% ESG premium based on our in-house methodology. Downside risks include weaker-than-expected retail performance, occupancy rates and rental reversions.

Target price: RM1.35 BUY

HONG LEONG INVESTMENT BANK RESEARCH (APRIL 25): 4QFY23 core net profit of RM8.9 million brought the FY23 sum to RM18.2 million. Upon exclusion of 2QFY23 results, which only accounted for 10 days, AME REIT’s 2HFY23 results of RM17.3 million were slightly above our expectations at 55% of the FY23 forecast, assuming the REIT had been in existence for the full year. The REIT was listed on Sept 20, 2022.

AME REIT declared a DPU of 1.82 sen/unit, going ex on May 9. The total DPU declared in FY23 stood at 3.80 sen per unit.

AME REIT’s portfolio consists of 33 industrial properties and three industrial-related dormitories. The overall portfolio occupancy rate remained robust at 100%.

The recently completed acquisitions of Indahpura’s Plot 15 and SAC’s Plot 43 in March 2023 as well as the imminent addition of Indahpura’s Plot 16 in 2QFY24 are set to lift AME REIT’s earnings in FY24.

On a macro level, despite the prevailing global economic woes, we gathered that the demand for local industrial properties remains unfazed with encouraging interest from multinational corporations in its i-Park projects. This is also evidenced by the robust growth in property sales of its sponsor AME Elite as well as the guided positive rental reversion for its leases due for renewal.

Target price: RM1.90 BUY

MIDF RESEARCH (APRIL 25): Aeon entered into a conditional sale and purchase agreement with Liziz Standaco Sdn Bhd to acquire 8.691ha of commercial land in Kota Baru, Kelantan. The total purchase consideration is RM165 million and the deal is expected to be completed by 3QCY23.

We are optimistic on the land acquisition as it gives higher stability to Aeon’s operation of AEON Mall Kota Baru. Note that Aeon is now leasing the site to operate AEON Mall Kota Baru. With the land acquisition, Aeon would have control over the property without worrying about lease expirations or rental hikes that would affect the operation of AEON Mall Kota Baru. Besides, the land acquisition could potentially result in long-term cost savings given that the group would no longer have to pay rent to a third-party landlord. Also, the acquisition is part of the company’s corporate strategy to concentrate on and grow its future retail operation.

We are positive about AEON’s FY23 outlook underpinned by its: (1) initiative to develop a variety of in-house private brands and labels at a reasonable price that are attractive to the B40 to M40 income group; and (2) efficient cost-saving measures that may support the margin.

Target price: 32 sen HOLD

CGS-CIMB RESEARCH (APRIL 25): HPP’s 3QFY23 revenue and core net profit fell 21.4% q-o-q and 35.2% q-o-q respectively. Sales across its three major product segments also fell, with corrugated packaging declining 25.8% q-o-q, non-corrugated packaging sliding 14.6% q-o-q and manufacturing of rigid boxes contracting 44.1% q-o-q, indicating a softening demand trend for its paper packaging, potentially due to reduced consumer demand at its end-user industries. Nonetheless, gross profit margin rose to 21.12% on lower cost of raw materials.

Going forward, we project a more subdued earnings outlook for HPP given the demand downcycle for electrical and electronic (E&E) consumer products, which form the bulk of HPP’s sales. Margin gains from lower input costs could be limited as HPP lacks pricing power, as evident by cuts in its selling price to customers.

We cut our FY23-25F EPS by 30.8% to 31% to reflect our lower revenue assumptions, given the softening E&E consumer demand. We downgrade HPP to “hold” from “add” on a more subdued earnings outlook, given the declining demand for paper packaging in the E&E sector due to lower demand. In line with our EPS cuts, our target price drops to 32 sen.

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