Broker: Maybank Investment Bank Berhad
Date of Report: June 10, 2025

Al-Salam REIT’s DISRUPT27: Revitalising for Long-Term Resilience and Growth

Introduction: Strategic Repositioning for a Robust Future

Al-Salam REIT, a Malaysia-based Shariah-compliant real estate investment trust, is charting a transformative path with its newly unveiled “DISRUPT27” strategy. This ambitious repositioning aims to build a more resilient and focused portfolio anchored around high-quality retail and industrial assets. At the heart of this transformation is the turnaround of its flagship asset, KOMTAR JBCC, by 2027, leveraging regional infrastructure developments such as the Rapid Transit System (RTS). Key initiatives include upgrading asset layouts, optimizing tenant mixes, and shifting towards higher-yielding, fixed-base rental arrangements.

KOMTAR JBCC: Flagship Asset Rejuvenation Underway

KOMTAR JBCC is experiencing significant upgrades:

• An alfresco dining area (~25,000 sq ft, 6.8% of net lettable area) was completed in Q1 2025.
• The second floor is being reconfigured to attract mini-anchor tenants, international brands, grab-and-go concepts, pharmacy, and F&B operators.
• A pedestrian overhead bridge (POB) is set to open in Q1 2027, expected to materially boost footfall.

Management anticipates occupancy rates to rise to 80–85% by 2027, up from 69% in Q1 2025, as space is reconfigured and lease structures migrate to fixed-base arrangements. This strategy is estimated to yield a rental upside of approximately MYR3.5 million (about 4% of revenue) by FY2026.

Financial Performance and Capital Structure: Progress with Caution

Al-Salam REIT’s Q1 2025 results reflected positive momentum:

• Retail net property income (NPI) margin increased from 55.9% to 58.4%.
• Net cash from operations surged over 90% year-on-year, driven by improved rental collections and operating leverage.

Despite these gains, the Trust’s gearing remains elevated at around 49%, constraining flexibility for near-term acquisitions. Management is actively exploring long-term debt refinancing to replace short-term borrowings and reduce cash flow volatility, targeting a capital structure reset in the second half of 2025.

Active Portfolio Recycling and Streamlining QSR Exposure

A core aspect of the DISRUPT27 plan is the gradual reduction of exposure to 42 KFC and Pizza Hut assets, which currently represent 41% of total assets. Al-Salam is collaborating with QSR to divest non-core and underperforming units, freeing up resources to enhance core retail and industrial segments. Notably:

• All QSR assets are fully tenanted under triple-net leases.
• Management is positioning Al-Salam to benefit from upcoming infrastructure projects—including the Electric Train Service (ETS), Rapid Transit System (RTS), and Electrified Double Track Project (EDTP)—to capitalize on cross-border retail and commuter traffic from 2026 onward.

Share Price Performance and Valuation

• Current share price: MYR0.39
• 12-month price target: MYR0.40 (+7%)
• Market capitalization: MYR226.2 million (USD53 million)
• 52-week high/low: MYR0.42 / MYR0.33
• Free float: 11.2%
• Major shareholders: Johor Corp. (52.5%), Tabung Amanah Warisan Negeri Johor (16.6%), Kumpulan Waqaf An Nur Bhd. (10.0%)

The counter has delivered an 8% absolute return over the past month and 15% over three months, although it is down 6% over the past year.

Financial Highlights: Growth and Profitability Metrics

Segmental Overview: Retail, Industrial, and QSR Assets

Al-Salam REIT’s portfolio spans:

• Retail assets, prominently KOMTAR JBCC, undergoing transformation.
• Industrial assets: Six properties across Malaysia, leased to QSR under triple-net lease arrangements.
• QSR-related assets: 42 KFC and Pizza Hut properties, forming 41% of the total asset base.

Transformative Portfolio Strategy: DISRUPT27 Roadmap

The DISRUPT27 strategy is designed to:

• Focus on high-quality retail and industrial segments.
• Reduce non-core asset exposure, especially QSR-related properties.
• Leverage infrastructure upgrades to drive cross-border and commuter-driven retail demand.
• Reconfigure existing spaces to attract resilient, high-yield tenants and international brands.

Valuation and Dividend Discount Model (DDM) Insights

• Total NPV: MYR234.4 million
• Number of shares: 580 million
• DDM target price: MYR0.40 per share
• Cost of equity: 9.9%
• Dividend terminal growth: 1%

Risks and Considerations

Investors should note several key risks:

• Changes in rental and occupancy rates, operating expenses, and interest rates may impact earnings.
• Significant portions of NLA at KOMTAR JBCC Mall (23%), @Mart Kempas (12%), and Menara KOMTAR (21%) face lease renewals in 2025.
• All Al-Salam REIT’s debts are on floating rates, increasing sensitivity to interest rate fluctuations.

Comprehensive Financials and Ratios Overview

• Net property income margins expected to strengthen from 65.5% in FY24 to 68.0% by FY27.
• Core net profit margins forecasted to rise from 5.6% (FY24) to 23.6% (FY27).
• Payout ratio projected at 90% from FY25 onwards.
• Net gearing remains high but is expected to gradually ease with strategic refinancing.
• Capex outlays to support asset rejuvenation, peaking at 20% of revenue in FY26 before normalizing.

Conclusion: Outlook and Investment Perspective

Al-Salam REIT’s DISRUPT27 strategy marks a decisive pivot towards sustainable, growth-oriented real estate investment. With a strategic focus on rejuvenating flagship assets, streamlining non-core holdings, and leveraging large-scale infrastructure projects, the Trust is positioning itself for long-term resilience and value creation. While near-term headwinds such as elevated gearing and lease renewals present risks, the potential for rental upside, operational efficiencies, and capital structure improvements provide a promising outlook for forward-looking investors seeking exposure to Malaysia’s evolving REIT sector.
Broker: Maybank Investment Bank Berhad | Date of Report: June 10, 2025