Broker's take: AmBank upgrades Malaysia Reits to 'overweight'

THE worst could be over for real estate investment trusts (Reits) in Malaysia, according to AmInvestment Bank (AmBank), which has upgraded the sector to "overweight" from "neutral".

In a research report on Thursday, AmBank said that Reits under its coverage will broadly be on a recovery path in the next 12 to 18 months, as consumer spending and footfall recover.

"We believe the Reits under our coverage will stage a firm recovery post-pandemic, especially once international travel is allowed," it said, adding that this is mainly due to their strong market position and brand name, as well as their strategic location in the heart of the city, which can make them more favoured over neighbourhood malls.

The brokerage noted that outbreaks of Covid-19 may cause bumps to the recovery, but said earnings visibility has been improving following the development of vaccines, with vaccinations already beginning in some countries.

Among the four Reits under its coverage, its top picks are IGB Reit and Sunway Reit.

AmBank said that the two Reits are primed to lead the recovery, underpinned by resilient local footfall as they have a well-connected adjacent community of residences, offices and universities. The Reits also attract mass affluent customers, who are more likely to spend during an economic recovery, it noted.

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The brokerage has a fair value of RM2.09 for IGB Reit, and RM1.94 for Sunway Reit. As at 10.54am on Thursday, units of IGB Reit were trading at RM1.72 on the Malaysian bourse, down 1.7 per cent, while Sunway Reit units were unchanged at RM1.51.

It noted that the other two Reits under its coverage - Pavilion Reit and YTL Hospitality Reit - will face more challenges in recovery due to greater reliance on tourist traffic. However, it remains positive on their long-term outlook as it believes "rebound in footfall will be strong" once the travel ban is lifted.

The fair-value price for Pavilion Reit is RM1.84, according to AmBank, while YTL Hospitality Reit's fair value is RM1.26. Units of Pavilion Reit were trading at RM1.57 as at 10.55am, down 0.6 per cent, while YTL Hospitality Reit units were up 1.1 per cent at RM0.89.

AmBank estimates that the Reits under its coverage provide distribution yields of more than 4.5 per cent for FY2021 and beyond, compared against the current low interest rate environment. "We like the sector as a recovery play sector, which we believe is poised to benefit from the growth in Malaysia's economy post-pandemic," it said.