KUALA LUMPUR: Kenanga Investment Research is maintaining its Overweight recommendation on Malaysian real estate investment trusts (MREITS) despite the 25 basis points rise in the Overnight Policy Rate (OPR) to 3.25%.
It said on Friday it did not expect the hike to have any significant impact on MREITs' earnings as MREITs have taken pre-emptive capital management measures over the last two years.
“We also believe the impact of this round of rate hikes on Malaysian Government Securities (MGS) yield has been priced-in by the market. However, should there be further hikes over the next six to 12 months, this may threaten our valuations and thus sector call,” it said.
Kenanga Research maintained its 10-year MGS target at 3.80% (20bps lower than current levels) on the premise of a possible European Quantitative Easing.
“Our target prices are and recommendatios are KLCC (Outperform; TP: RM6.90), Sunway REIT (Outperform; TP: RM1.56), CMMT (Outperform; TP: RM1.59), IGB REIT (Outperform; TP: RM1.35) and Axis REIT (Underperform; TP: RM3.08). Our Top Pick is KLCC due to earnings excitement from a potential acquisition,” it said.
It said Bank Negara Malaysia (BNM) raised the OPR by 25bps to 3.25%, after the Monetary Policy Committee (MPC) meeting on Thursday, which was the first rate hike since May 2011.
It added the increase in OPR was expected, given the rising inflationary pressure. The monetary authority had placed the floor and ceiling rate for the OPR at 3% and 3.5% respectively.
Kenanga Research explained the increase in OPR rates was typically negative on REITS' earnings in general due to higher financing cost.
However, it pointed out most of the MREITs under its coverage had taken pre-emptive capital management actions over the last two years in view of rising interest rates.
“Most have changed their debt mix to lean towards fixed rather than floating rate debts and those under our coverage have between 60% and 99% fixed rate debts, save for KLCC which has only 32% of its debts in fixed rates.
“A 25bps hike in OPR will have immaterial impact on the MREITs under our coverage; this also applies to KLCCSS. We did a stress test on KLCC and a 100bps increase in effective financing rates will reduce core earnings by only 1.6%, which we deem as not significant,” said the research house.