Analysts turn cautious on IGB REIT, no thanks to MCO 2.0

KUALA LUMPUR (Jan 26): The implementation of the second Movement Control Order (MCO 2.0) and resurgence of Covid-19 cases have clouded the outlook of retail real estate investment trust (REIT) IGB REIT.

Investment analysts have trimmed IGB REIT’s target price (TP) although the group’s earnings for the fourth quarter ended Dec 31, 2020 (4QFY20) beat market consensus expectations.

Analysts including those from Kenanga Research, MIDF Research and Hong Leong Investment Bank (HLIB) Research have cut IGB REIT’s TP to between RM1.60 and RM1.88.

As at noon break, IGB REIT, which owns the MidValley Mega Mall and The Gardens Mall, closed at RM1.64, valuing it at RM5.84 billion.

Kenanga Research analyst Marie Vaz said IGB REIT’s FY20 realised net income (RNI) of RM236.8 million came in above the research house’s expectations, as Kenanga was conservative in its 4Q earnings outlook in light of the spike in Covid-19 cases.

However, she cautions that the group’s near-term outlook remains uncertain due to the spike of Covid-19 cases, noting the likelihood of cutting earnings forecast if stricter lockdowns are imposed.

According to Vaz, the impact of MCO 2.0, which was enforced on Jan 13, will continue to put a strain on Malaysian retail REITs as it threatens shoppers’ footfall, car traffic volume and could result in higher temporary closure of retail shops.

“We do not expect the acquisition of Southkey Mall in Johor in the near term and reckon that it would take at least one reversion cycle or longer in light of the Covid-19 pandemic for the asset to stabilise before being acquired by IGB REIT, likely by FY22-FY23,” she said.

For now, Vaz maintains a "market perform" call on IGB REIT and TP of RM1.60 (from RM1.64 previously). She said Kenanga will continue to monitor the situation closely but opt to remain conservative on earnings and valuation outlook.

MIDF Research analyst Jessica Low Jze Teing expects shopper footfall to be low in 1QFY21, which in turn would reduce rental income of IGB REIT as the group collects turnover rent from food and beverages tenants.

Following this, Low revised IGB REIT’s TP lower to RM1.61 from RM1.66, with a "neutral" call as MIDF continues to see challenging outlook for retail malls in Klang Valley in 1HFY21, adding that they expect earnings to recover in 2HFY21 when vaccine is widely available.

“Meanwhile, dividend yield is estimated at 4.9% for FY21,” Low said.

HLIB Research analyst Farah Diyana Kamaludin commented that the ongoing MCO, which is scheduled to end on Feb 4, alongside the rising Covid-19 cases may put a dent on Chinese New Year sales performance year-on-year (y-o-y).

“We gathered that IGB REIT is open to providing rental assistance to its tenants that needed support on a case-to-case basis. We believe IGB REIT’s low exposure to tourists (less than 10% exposure to international tourists) and its prominent location will aid in surviving this challenging environment.

“Post earnings adjustments, our TP fell to RM1.88 (from RM2.01). Our TP is based on FY21 DPU [distribution per unit] on targeted yield of 4.5% which is derived from two-year historical average yield spread between IGB REIT and 10-year MGS [Malaysian Government Securities] yield. Maintain ‘buy’,” she said.

Furthermore, Farah Diyana said HLIB continues to favour IGB REIT for its robust asset quality in prominent locations with low tourist exposure that the research firm believes will drive a quick recovery post-MCO.

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