IGB REIT earnings expected to be resilient

IGB Real Estate Investment Trust (Dec 20, RM1.57)

Maintain buy with a target price (TP) of RM1.70: Although 2016 has been hit by weak business sentiment and the deterioration of the ringgit, the nation’s consumer sentiment has gradually improved compared with 2015. Gross domestic product data is showing a more positive trend emerging in 2016, with key drivers being a growing population, young demographic trend, healthy employment market and sustained income levels in urban areas, among others. The Malaysia Retail Group expects retail sales growth of 3% year-on-year in 2016 and 5% in 2017, with stronger growth from specialty stores.

IGB Real Estate Investment Trust (REIT) management’s feedback remains positive about retail sales growth at Mid Valley Megamall (MVM) and The Gardens Mall (TGM), likely to be in the high single digits in 2016. This is underpinned by the malls’ strategic locations (flanked by affluent neighbourhoods and being a regional mall to suburban neighbourhoods around Kuala Lumpur) and a diverse tenant mix and management’s experience in managing mass-market and upper-class retail expectations.

We reiterate our “buy” rating and dividend discount model-derived 12-month TP of RM1.70. We expect IGB REIT’s earnings to remain resilient on stable occupancy rates (about 100%), an experienced management team, and more efficient cost management. We think 2016 to 2018 distribution per unit (DPU) yields remain attractive at 5.6% to 6.3% vis-à-vis the peer averages of 5.3% to 5.8%. The likelihood of sustained renewals in 2017 (with 40% of MVM’s and 42% of TGM’s net lettable areas due for renewal) and positive rental reversions continue to justify the higher DPU payouts in IGB REIT’s financial year ending Dec 31, 2017 (FY17) to FY18, in our view.

Risks include slowdown in consumer spending, competition from new supply and online websites and higher debt-refinancing rates. — Affin Hwang Capital, Dec 20

This article first appeared in The Edge Financial Daily, on Dec 21, 2016. Subscribe to The Edge Financial Daily here.