Weak consumer sentiment to weigh on REITs’ earnings

PETALING JAYA: AmInvestment Bank Research said weak consumer sentiment is expected to be a drag on earnings for retail real estate investment trusts, as the impact of the movement control order and its spillover effects on the economy may result in lower rental income.

In a note, the research house revised its REIT sector FY20-FY21 earnings forecast downwards by a further 5% assuming a lower rental rate given the near-term uncertain outlook.

Last month, AmResearch reduced the FY20 and FY21 earnings forecasts for retail REITs by about 15% each year to reflect the impact of the MCO and its spillover effects on the economy which may result in lower rental income.

“As the economy may take some time to regain its momentum, we believe the impact to the bottom line will be felt for at least several months,” it said.

Cautioning a challenging near-term outlook for retail/hospitality REITs, it said retail REIT managers are adopting a proactive stance in supporting their tenants through this difficult time.

“For YTL REIT, its properties in Malaysia and Japan are under master leases. Hence it will remain stable. Nonetheless, we cut its FY20 and FY21 by a further 5% each to reflect the lower earnings from its Australian properties due to the Covid-19 outbreak and its impact to the global economy.”

AmResearch maintained its neutral view on the property and REIT sector as the overall sentiment remains weak.

It said most developers are still assessing the economic situation, and deliberating whether to continue or defer future launches. It believes consumer sentiment will remain weak for the time being with spending mainly focused on necessities while big-ticket items such as properties take a back seat.

“Nevertheless, developers under our coverage have reasonable amounts of unbilled sales, hence they shall remain profitable in FY20–FY21. To remain prudent, we are lowering our assumptions on their sales target, and cutting our earnings forecasts to reflect the impact from lower sales and the timing of revenue recognition.”

AmResearch remained cautious on the financial leverage of companies as it is one of the key factors to their survivability during an economic downturn. Based on its data, the net gearing of developers under its coverage is still under control with net gearing averaging at about 36% while interest coverage remains strong at about eight times.

If the current economic condition persists, it believes property developers will still trade at their current price-to-book value levels. “However, we will reduce our discount to revised net asset value when the economic conditions and new sales improve in the future,” AmResearch said.

Its top picks for the sector are Sunway Bhd and IOI Properties Group Bhd. It also maintained its ‘buy’ recommendation on Sunway REIT, YTL REIT, Mah Sing Group Bhd, UEM Sunrise Bhd and Crest Builder Holdings Bhd.

Meanwhile, CGS-CIMB reiterated its neutral call on REITs due to near term earnings risks.

“Despite the tough outlook facing retail malls due to Covid-19, we still like IGB REIT for its prime assets, high occupancy rates and zero exposure to hotels, which should mitigate weak tenant sales.

“We also prefer Axis REIT’s purer exposure to the industrial/warehouse segment, which faces the lowest threat from Covid-19 and MCO,” it said.

source https://www.thesundaily.my/business/weak-consumer-sentiment-to-weigh-on-reits-earnings-ME2240961