This article first appeared in Capital, The Edge Malaysia Weekly on January 15, 2024 - January 21, 2024

NEUTRAL 

KENANGA RESEARCH (JAN 9): Against a broadly subdued economic climate, we believe the growing interest in in-person retail transactions, particularly in prime locations, could benefit commercial real estate investment trusts (REITs). With increased footfall from both locals and foreign tourists, an associated rise in spending is anticipated. Simultaneously, the gradual return to in-office work arrangements will offer some support to office demand, which may lead to a rise in overall occupancy for office assets that may have been depressed from remote working arrangements. Similar to the industrial space, we foresee growth as it becomes a prevailing trend in certain regions, thanks to the influx of foreign manufacturing demand paired with an anticipated rise of general exports.

On the flipside, we believe the sector’s prospects could face sustained challenges. In the near term, expectations for retail spending appear subdued due to cautious consumer habits and economic concerns. We opine that the implementation of luxury taxes and higher sales and service tax (SST) rates to be imposed in 2024 may further widen the gap for aspirational spending.

Backed by the still challenging industry dynamics, we are keeping our “neutral” stance. Within the sector, we still like REITs with the following attributes: 1) niche in the right business segments, particularly in retail and office; and 2) own property assets in prime and strategic locations, which will continue to provide resilient rental income streams.

From a valuation perspective, Pavilion Real Estate Investment Trust (PAVREIT) and Sunway Real Estate Investment Trust (SUNREIT) emerge as our top retail-centric picks as we believe their risk-to-reward is favourable. We expect PAVREIT to remain resilient, attributed to its prime locations that cater to a diverse range of target markets, and not solely concentrated on the high-end segment. On the other hand, SUNREIT may have a balance buffer against sector risk exposures, thanks to its diversified assets and strong brand equity. We maintain a cautious stance on Axis Real Estate Investment Trust (Axis REIT), our sole industrial REIT, as its occupancy rates had declined to 92% at end-September 2023 (compared with 95% at end-September 2022). The increased supply of industrial properties may intensify competition, providing potential tenants with a broader range of choices.

Target price: RM1.93 BUY

PHILLIP RESEARCH (JAN 9): Kerjaya signed a letter of award (LOA) with Tanjung Pinang Development Sdn Bhd for the superstructure works on Gurney Marine Bridge Phase 2. This contract is valued at RM69.2 million, with work expected to be completed by 1Q26. In addition, Kerjaya also signed an LOA with Persada Mentari Sdn Bhd for the substructure work of a proposed 50-storey serviced apartment in Andaman Island for a contract value of RM25.9 million. This project is expected to be completed by 1Q24. Both Tanjung Pinang Development and Persada Mentari are indirect subsidiaries of Eastern & Oriental Bhd (E&O).

The two contracts will boost Kerjaya’s order book by another RM95.1 million, bringing the current outstanding order book to RM4.6 billion, which provides earnings visibility until 2027. Inclusive of these wins, cumulative contracts secured to date stood at RM266.1 million, on track to meet our RM1.5 billion full-year 2024 order book replenishment assumption. Based on our back-of-the-envelope calculation, we estimate both contracts to contribute a Patami of about RM9.5 million across the contract period, assuming a 10% PAT margin.

Target price: RM2.04 BUY

HONG LEONG INVESTMENT BANK RESEARCH (JAN 9): Our recent meeting with the management bolstered optimism about the group’s future prospects. The recent -6.1% quarter-on-quarter decline in 3Q23 core earnings was primarily due to a drop in profit share from RHB Bank Bhd, which overshadowed the robust growth and strength of OSK’s business segments, notably from cables, integrated building systems (IBS) and capital financing. The bright prospects of capital financing and cables are reflected in the valuation and share price of OSK’s listed peers. We view OSK as a laggard to its peers as its current share price has yet to reflect the value of these businesses. For its property development, we expect launches to pick up in 2024 following the delay of launches for several projects in 2023.

We maintain “buy” with a higher target price of RM2.04, up from RM1.77. Our TP is on the conservative side as it implies an undemanding FY23/24/25 PER of 8.7/8.6/8.2 times. We believe the stock should gain increasing interest given that its own business segments, especially capital financing and industries, are demonstrating strong growth and should play a bigger role in contributing to the group’s earnings moving forward.

Target price: RM7.30 ADD

CGS-CIMB RESEARCH (JAN 9): Our key takeaways from investor meetings with TM’s management at CGS-CIMB’s Malaysia Corporate Day 2024 were 1) healthy demand for its fixed-mobile converged product, which was launched in October 2023; 2) limited downtrading for its fibre broadband products; and 3) better than (management) expected outcomes from its wholesale broadband pricing negotiations. In our view, these indicate a continuation in the positive revenue and earnings trends at TM in FY24. We expect the company to deliver 10.4%/12.3% pre-tax profit growth in FY23/FY24 driven by revenue growth of 4.3%/3.6%.

We reiterate our “add” call on TM with an unchanged target price of RM7.30. At current valuation of FY24 PER of 13.4 times and FY24 enterprise value/Ebitda of 4.5 times, TM’s valuations look undemanding versus its domestic and Asean peers. We see continued earnings delivery coupled with potentially higher dividends providing the key rerating catalysts over the next 12 months. Key downside risks, in our view, would be increased regulatory intervention by the government in its social objectives (such as higher discounts) and TM taking a leading role in the fifth generation (5G) wireless network.

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