IGB REIT’s rental income growth encouraging amid challenging market conditions

IGB Real Estate Investment Trust (Jan 24, RM1.62)

Maintain hold with an unchanged target price (TP) of RM1.63: IGB Real Estate Investment Trust (REIT) has reported a strong set of results — financial year 2017 (FY17) realised net profit grew 9% to RM303 million on higher revenue (+3.5% year-on-year [y-o-y]), a stable net property income margin (71%), and lower interest expenses. IGB REIT’s 4.6% gross rental income growth is commendable, given the challenging retail mall market conditions. Overall, the results are within our and the market’s expectations. IGB REIT also declared a second income distribution of 4.9 sen (fourth quarter of FY16 [4QFY16]: 4.3 sen), bringing the full-year distribution to 9.28 sen (FY16: 8.71 sen).

IGB REIT’s 4QFY17 realised net profit grew 9.7% y-o-y to RM77 million on higher revenue and lower interest expenses. Sequentially, its 4QFY17 realised profit was 7% weaker quarter-on-quarter due to write-back of interest expenses in 3QFY17.

We tweak our FY18 to FY19 earnings per share estimates by 0% to 1% after incorporating IGB REIT’s actual FY17 results. We maintain our “hold” rating with a TP of RM1.63. IGB REIT is our preferred pick among the retail-centric Malaysian REITs — we like its first-class assets, strong balance sheet and exciting asset-acquisition outlook. However, the weak retail mall market and possible rate hike(s) may weigh on investor sentiment. At 5.6% 2018 distribution per unit yield, valuation is within the historical trading range and looks fair. A key rerating catalyst is the opening of Southkey Megamall (a joint-venture project between IGB Corp Bhd and a Johor-based company) on Aug 8, 2018.

We estimate that every 25-basis-point increase in cost of equity (from 8.2%) would lower our fair value (FV) by 4%, while every 50-basis-point change in our long-term growth assumption (3%) would increase/decrease our fair value by 7%. — Affin Hwang Capital, Jan 24

This article first appeared in The Edge Financial Daily, on Jan 25, 2018.

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