This article first appeared in Capital, The Edge Malaysia Weekly on January 13, 2025 - January 19, 2025

OVERWEIGHT

RHB INVESTMENT RESEARCH (JAN 7): We think Malaysian real estate investment trusts (M-REITs) will continue to do well in 2025 on the back of strong fundamentals and a stable macroeconomic outlook. The occupancy rates for REITs under our coverage have improved to high levels, and managements are largely guiding healthy rental reversions ahead. While market sentiment has shifted to slower interest rate cuts in 2025, we think the downward trajectory would still be supportive of REITs’ valuations over the medium term.

Although the US 10-year bond yield has been more volatile, ranging from 3.6% to 4.7% in 2024, the 10-year Malaysian Government Securities (MGS10) yield has remained broadly stable around 3.8%. While we do not expect any cuts to the overnight policy rate in 2025, interest rate cuts globally should place downward pressure on the MGS10 yield, supporting REITs’ valuations.

The growth rate of new supply of retail space in Kuala Lumpur is expected to ease over the next two years, which should lead to better occupancy rates. Retail spending should also remain strong, boosted by a higher minimum wage, a broad civil servants pay hike, and an improving tourism industry. As such, we generally expect mid-single-digit rental reversions for the retail REITs under our coverage, with more upside to rental rates for Sunway Real Estate Investment Trust (KL:SUNREIT) and IGB Real Estate Investment Trust (KL:IGBREIT), following their major refurbishments.

We think the current improved sentiment on REITs (including sizeable listing of new REITs, which could garner more interest) is favourable for asset acquisitions, to be funded via a combination of debt and equity with less dilutive effects. After Axis Real Estate Investment Trust’s (KL:AXREIT) largest private placement yet in October 2024, 2025 will see a sizeable placement for Pavilion Real Estate Investment Trust’s (KL:PAVREIT) acquisitions of Banyan Tree and Pavilion Hotel and, potentially, for the balance payment of Pavilion Bukit Jalil. Sunway REIT could also enter the capital market, as it aims to grow its portfolio to RM14 billion by end-2027, from RM10 billion currently.

We like Axis REIT as a proxy for the resilient industrial property segment. The REIT announced RM684 million in new acquisitions in 2024, which should result in a 10% distribution-per-unit growth in FY25 despite its higher share base. We also like Sunway REIT for its robust earnings outlook, underpinned by its diversified portfolio and active acquisition strategy.

Fair value: RM3.25 BUY

AMBANK RESEARCH (JAN 7): Keyfield International Bhd (KL:KEYFIELD) is acquiring a five-year-old China-flagged platform supply vessel (PSV) for US$17.6 million (RM79.2 million). In addition, the group will incur costs amounting to US$2.2 million for the purpose of inspection, dry docking, delivery expenses and its conversion into a Malaysian-flagged vessel upon completion of the purchase. Delivery is expected in February, while the latter process is expected to be completed by June at the latest.

We are positive on the acquisition, as the PSV space is lucrative, with a tight supply. According to our checks, there were only 10 PSVs in Malaysia as at end-December 2023. We believe it is status quo, as no other acquisitions or newbuilds in this category have been announced by other local charterers or shipbuilders. Though our sensitivity analysis presents a 7% bump to our FY25F core net profit, we maintain our forecasts for now pending acquisition of a charter contract for the vessel. With sufficient headroom for funding, we believe Keyfield is still in pole position for further fleet expansion initiatives in the near term. Our target price of RM3.25 is based on CY26 PE of 10 times, on a par with the local oil and gas services and equipment sector average. The group currently trades at a compelling one-year forward PE of 7.4 times.

Target price: RM15.80 BUY

CIMB SECURITIES (JAN 7): Tenaga Nasional Bhd (KL:TENAGA) announced that the government approved the implementation of Regulatory Period 4 (RP4) under the incentive-based regulation framework for January 2025 to December 2027. Total allowed capital expenditure (capex) is RM42.8 billion (base: RM26.6 billion, contingent: RM16.3 billion). Total allowed operating expenditure (opex) is RM20.8 billion (16% above RP3), while the regulatory rate of return is 7.3% (same as RP3). The current electricity tariffs will be in effect until June, with Tenaga proposing a 14% base tariff hike to 45.62 sen per kWh from July. This is mainly to factor in higher projected coal cost of US$97 per tonne (RP3: US$79 per tonne) and gas prices of RM35 per MMBtu to RM46 per MMBtu (RP3: RM30 per MMBtu to RM33 per MMBtu), bringing these closer to current levels.

We estimate every RM1 billion of capex above RM35.5 billion will add 3.6 sen per share to our DCF-based fair value for Tenaga, and vice versa. Our current FY25 to FY27F core EPS forecasts may also be enhanced by 2% to 7%, based on the maximum allowed capex of RM42.8 billion.

We currently project healthy core EPS growth of 12.1% and 7.4% year on year in FY25F and FY26F respectively. Tenaga trades at a reasonable FY25F EV/Ebitda of 7.8 times and offers decent FY24 to FY26F dividend yields of 2.9% to 3.5%.

Target price: RM2 NEUTRAL

PUBLIC INVESTMENT BANK RESEARCH (JAN 7): Kerjaya Prospek Group Bhd (KL:KERJAYA) was appointed by its related party, Eastern & Oriental Bhd (KL:E&O), to build 360 units of landed housing in Elmina West, Shah Alam, for RM256.4 million. This job marks the group’s first job win of the year, accounting for 12.8% of our FY25 job replenishment target of RM2 billion. With this new job, the group’s outstanding order book increased by 6.5% to RM4.2 billion. All told, we keep our forecasts unchanged, as this forms part of our FY25 order book replenishment assumption. Based on our estimation, this job is expected to contribute 5% to 6% per year on average to the group’s earnings during the 26 months’ contract period, assuming low-teen margins. We maintain our “neutral” call on KPGB, with an unchanged SOTP-based target price of RM2.

The project involves the construction of 360 three-storey terraced houses, alongside a clubhouse, Tenaga Nasional substation, landscaping and other related infrastructure. This project will be delivered in three phases, with construction set to begin on Jan 20, 2025, and completion targeted for 1QFY27 (within 26 months).

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