PP 7767/09/2010(025354)

23 April 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Sector Upda te
23 April 2010
MARKET DATELINE

Property - M-REITs Recom : Overweight

(Maintained)
A New “Norm” To Propel Valuations To New Highs

Table 1 : Property Sector Valuations

EPS growth DPU growth GDY
Company FYE Price FV (%) PER (x) (%) (%) Gearing Rec
(RM/s) (RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY11 (x)
Axis REIT Dec 2.01 2.35 3.0 8.7 12.2 11.2 4.1 8.7 8.2 8.9 0.35 OP
Quill Capita Dec 1.08 1.17 7.3 4.7 12.1 11.6 6.8 4.7 7.6 7.9 0.38 OP

Sector Avg 7.0 7.1 12.2 11.4 7.9 8.4

* price at 22 Apr 10

♦ A new “norm”. While in terms of yields, M-REITs are currently already trading at Chart 1: Yield Gap Between M-
a slight premium to (i.e. lower than) the historical average. We remain bullish on REITs & S-REITs (bps)
the sector. We expect a new “norm” to gradually emerge, taking the premium (%)
13.0

higher to match or even surpass the high end of the historical range, propelled by 11.0

a buoyant stock market, and more importantly, the continued narrowing of the 9.0

yield gap with S-REITs. 7.0

5.0

♦ Convergence is not theory but actual work-in-progress. While the 3.0

1Q072Q073Q074Q071Q082Q083Q084Q081Q092Q093Q094Q091Q 10

convergence between M-REITs and S-REITs is not a new story in the market, we
M-REIT (%) S-R EIT (%)
believe investors have not fully appreciated that this story is fast turning into
Source: RHBRI, Bloomberg
reality. On a normalised basis, the yield gap between M-REITs and S-REITs has
narrowed from 316 bps in 2007 to 197 bps in 2008, and further to 132 bps in
Relative Performance To FBM
2009-2010 (up to 1Q2010) (see Chart 1). We believe the convergence has been KLCI
driven largely by the growing, and hence improved relative investability of the M-
REIT sector vis-à-vis the S-REIT sector.
♦ A slight premium to historical valuations, but history is to be re-written. FBM KLCI

At present, M-REITs trade at 7.7% net yield, at a slight premium to its historical
average of 7.9%. However, on the back of a buoyant stock market and a new Axis REIT
“norm” that is taking shape with the rising relative investability of M-REITs vis-a-
vis S-REITs, we expect M-REIT yields to soon revisit the lows of 6.8-7.0% prior to
the recent financial crisis, before heading towards the 6% level currently
commanded by S-REITs.
♦ Yield gap between M-REIT and MGS to narrow. At present, the yield gap
Relative Performance To FBM
KLCI
between M-REITs and the 10-year MGS is 364 bps that is fairly consistent with the
historical average of 380 bps. Similarly, on the back of a buoyant stock market
and a new “norm” that is taking shape with the rising relative investability of M- FBM KLCI

REITs vis-a-vis risk-free debt, we expect the yield gap between M-REITs and the
10-year MGS to soon revisit the historical lows of 330-336 bps prior to the recent
financial crisis, before heading towards new lows. Quill Capita

♦ Maintain Overweight on the M-REIT sector. We continue to be bullish on M-

REITs due to: (1) The bright prospects of the investment property sector in
Malaysia underpinned by economic growth, rising consumerism backed by a young
demographic structure in Malaysia and growing tourist arrival; (2) Rising M-REITs’
relative investability vis-à-vis S-REITs and risk-free debt on the back of an Joshua CY Ng
(603) 92802151
expanding publicly traded M-REIT sector; and (3) Rising investors’ appetite for joshuang@rhb.com.my
asset classes that provide a hedge against inflation such as REITs.

Please read important disclosures at the end of this report.

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 23 April 2010

A New “Norm” To Propel Valuations To New Highs

♦ A new “norm”. While in terms of yields, M-REITs are currently already trading at a slight premium to (i.e. lower
than) the historical average, as yields are inversely correlated to share price), we remain bullish on the sector as
we expect a new “norm” to gradually emerge, taking the premium higher to match or even surpass the high end
of the historical range, propelled by a buoyant stock market, and more importantly, the continued narrowing of
the yield gap with S-REITs.

♦ Convergence is no theory but actual work-in-progress. While the convergence between M-REITs and S-
REITs is not a new story in the market, we believe investors have not fully appreciated that it is fast turning into
a reality. On a normalised basis (i.e. excluding 4Q08, 1Q09 and 2Q09 at the height of the recent financial crisis),
the yield gap between M-REITs and S-REITs has narrowed from 316 bps in 2007 to 197 bps in 2008, and further
to 132 bps in 2009-2010 (up to 1Q2010) (see Chart 1). We believe the convergence has been driven largely by
the growing, and hence improved relative investability of the M-REIT sector vis-à-vis the S-REIT sector. Over the
last 5-6 years, the number of publicly traded M-REITs has jumped by almost four-fold from three to eleven, and
in terms of market value, by more than 3x from RM1.7bn to RM5.3bn (see Charts 2 & 3). With at least three
more new M-REITs to be listed over the immediate term, we believe the convergence will accelerate further.

Chart 1: Yield Gap Between M-REITs* & S-REITs

(%)
13.0

11.0

9.0

132 bps
7.0 197 bps

316bps

5.0

3.0
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10

M-REIT (%) S-REIT (%)

* Net yield
Source: RHBRI, Bloomberg

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 23 April 2010

Chart 2: Number Of Listed REITs In Malaysia

No. of REITs
15
14

12 11 11 11

9
7

3
3

0
2005 2006 2007 2008 2009 2010e#

# including Suncity REIT, CapitalRetail Malaysia Trust and Qatar REIT

Source: RHBRI, Companies

Chart 3: Market Capitalisation Of M-REITs

RM bn

6.0
5.3
5.1 5.2
5.0

3.9
4.0

3.0 2.8

2.0 1.7

1.0
2005 2006 2007 2008 2009 1Q2010

Source: RHBRI, Companies

♦ A slight premium to historical valuations, but history is to be re-written. At present, M-REITs trade at
7.7% net yield, at a slight premium to its historical average of 7.9% (excluding anomalies in 4Q08, 1Q09 and
2Q09 at the height of the recent financial crisis). However, on the back of a buoyant stock market and a new
“norm” that is taking shape with the rising relative investability of M-REITs vis-a-vis S-REITs, we expect M-REIT
yields to soon revisit the lows of 6.8-7.0% prior to the recent financial crisis (see Chart 4), before heading
towards the 6% level currently commanded by S-REITs. Falling yields mean share price appreciation for REITs.

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 23 April 2010

Chart 4: Historical M-REIT Yields

(%)
10.5

9.5

8.5

7.5

6.5
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10

M-REIT Average

* net yield (adjusted for 10% withholding tax)

Source: RHBRI, Bloomberg

♦ Yield gap between M-REIT and MGS to narrow. At present, the yield gap between M-REITs and the 10-year
MGS is 364 bps that is fairly consistent with the historical average (excluding anomalies in 4Q08, 1Q09 and 2Q09
at the height of the recent financial crisis) of 380 bps. Similarly, on the back of a buoyant stock market and a
new “norm” that is taking shape with the rising relative investability of M-REITs vis-a-vis risk-free debt, we
expect the yield gap between M-REITs and the 10-year MGS to soon revisit the historical lows of 330-336 bps
prior to the recent financial crisis (see Charts 5 & 6), before heading towards new lows.

Chart 5: Yields of M-REITs* vs 10-year MGS

(%)
12.0

10.0

8.0

6.0

4.0

2.0
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10

M-REITs MGS

* net yield (adjusted for 10% withholding tax)

Source: RHBRI, Bloomberg

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 23 April 2010
Chart 6: Yield Gap Between M-REITs & 10-Year MGS
bps
800

700

600

500

400

300
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10

Yield gap Average

Source: RHBRI, Bloomberg

♦ Risks and concerns. The risks include: (1) Non-renewal of tenancy after expiry; (2) Unfavourable economic
conditions; and (3) Interest rate hikes that will reduce the yield spread between M-REITs and risk-free rate.

♦ Forecasts. Maintained. We value Axis REIT and Quill Capita based on yield benchmark of 7%, pre-crisis level,
and after taking into account the relative market capitalisation and liquidity.

♦ Maintain Overweight on the M-REIT sector. We continue to be bullish on M-REITs due to: (1) The bright
prospects of the investment property sector in Malaysia underpinned by economic growth, rising consumerism
backed by a young demographic structure in Malaysia and growing tourist arrival; (2) Rising M-REITs’ relative
investability vis-à-vis S-REITs and risk-free debts on the back of an expanding publicly traded M-REIT sector; and
(3) Rising investors’ appetite for asset classes that provide a hedge against inflation such as REITs.

Chart 7: AXReit Technical View Point

♦ The share price of AXReits rebounded from a low of
RM0.995 in late 2008, to a high of RM2.07 in Nov
2009.

♦ As the stock failed to sustain at above the RM2.06

resistance level, it derailed from its uptrend and
turned into a sideways consolidation mode.

♦ Since then, it has been trending between a low of

RM1.90 and a resistance of RM2.06.

♦ Of late, the stock’s short-term momentum

increased slightly as it rebounded to above the 10-
day SMA of RM2.00 and ended Thursday at
RM2.01, with a “positive harami” candle.

♦ Technically, the stock should continue its sideways

movement in the near term and face a similar
resistance at RM2.06, while support can be
expected near the 10-day and 40-day SMAs near
RM2.00.

♦ Further downside support is at RM1.90.

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IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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