IGB Mid Valley Megamall
AS the sell off in stocks continue with no immediate end in sight, it is no surprise that some fund managers and analysts are highlighting good opportunities in stocks that offer decent dividend yields.
After all, the overnight policy rate (OPR) had already seen two rounds of cuts this year alone and returns from fixed deposits will reduce in the days ahead.
Economists are also not discounting another round of rate cut in Malaysia given the continued spread of the Covid-19 which has impacted the global economy.
Dividend yielding stocks could be an attractive investment proposition on the surface, however there would need to be some consideration put as to how some of these companies derive their earnings and whether their earnings could be impacted by the current economic environment due to the Covid-19 outbreak.
“In times like these, most people tend to be defensive and will flock to dividend yielding stocks. But there is a question then of whether some of these historical yields can be sustained in light of the economic environment, ” Interpacific head of research, Victor Wan tells StarBizWeek.
“For example some of the bigger malls such as Mid Valley or even Pavilion can be affected with how the Covid-19 is developing presently. Retailers might not do too well as shoppers will be kept away so we may see reduced footfall for some of these retailers, ” he adds.
Wan notes that to compensate for this, REITS can choose to actually borrow and pay out dividends to sustain their yields but it is an option which he does not think these REIT companies would choose to do at this point in time.
“It doesn’t make sense for them to do it. They could also gain from rental revisions but I doubt there could be a lot or any for this year, ” he says.
Real estate investment trusts (REITS) have been a default or often thought about defensive investment instrument by the investment community in more recent times.
Ambank Research in its latest report following the more recent OPR cut notes that REITSs are still resilient, following their latest quarterly financial filings to the Bursa Malaysia.
The research house says it sees the outlook for retail properties, especially shopping malls, to remain stable in the medium term in spite of the Covid-19 outbreak.
“Shopping malls and hotels are poised to gain from the recent stimulus measures with a 15% discount in monthly electricity bills for six months from April until Sept 2020, while at the same time shopping malls are also encouraged to reduce rentals of their tenants
and hotels to offer discounts to customers, ” Ambank Research says.
“We reckon the impact to our retail and hospitality reit players to be minimal as
we believe that the hotel and shopping mall players will be able to manage the reduction in cost and revenue efficiently, ” it adds.
Meanwhile, Affin Hwang Capital Research says in its latest report on Wednesday that the second round of OPR cuts should be able to support the reits valuations.
“Given the OPR cut and declining global government bond yields, we expect
the 10-year Malaysian government securities yields to remain below 3.00%, it was 2.79% as at March 3.
The compression in MGS yields should, in turn, drive investor demand for alternative yielding assets such as the reits, thereby re-rating the sector’s valuation, ” Affin Hwang says.
The question arises then as to whether these some of these REITS can sustain their historical dividend payouts especially those operating within the industries that are susceptible to the weakness in the economy due to Covid-19 such as the hoteliers and retailers.
These include REITS such as YTL Hospitality REIT, Pavilion REIT, Sunway REIT, Hektar REIT and IGB REIT.
Analysts say that local hoteliers might see slight support from the stimulus measures rolled out by the government recently. However, even locals may put off travel plans to local destinations given the worsening Covid-19 outbreak presently.
Morgan Stanley Research had also warned of headwinds that will face retail and hotel REITS due to the global spread of Covid-19.
This will stifle the performance of hospitality, and retail-related REITS, Morgan Stanley said.
The fear factor with regards to the Covid-19 is also evident in global markets as well with the US’ 10-year treasury yields having dropped to an all-time low of 0.808% at press time, indicating that people are driving up the prices of safe haven instruments such as the US government bonds.
Another analyst points out that some of the consumer stocks that have been battered down such as CARLSBERG BREWERY MALAYSIA BHD and HEINEKEN MALAYSIA BHD (HEIM) by recent political upheavals in Malaysia can be re-visited if they feel yields are compelling enough at current prices.
“Although the government has not announced any change to policies - it is perceived that the risk in these stocks are actually higher due to the greater prominence of PAS in the Perikatan Nasional coalition. Notwithstanding that, our preference is for HEIM as it is a cheaper alternative to Carlsberg, ” RHB Research Institute head of research Alexander Chia tells StarBizweek.
“It is whether they can sustain the historical dividend payouts and note that the demand is quite inelastic with the launch of new brands and the continued clampdown on smuggling.
These arguments are still valid but there is now greater perceived policy risk and I think we should wait and see I think yields for these stocks can do a lot better than what it is at the moment unless one holds to the view that the policy risk to them is overblown, ” he says.
https://www.thestar.com.my/business/business-news/2020/03/07/dividend-yielding-stocks-getting-more-attractive
