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IGB Real Estate Investment Trust (April 24, RM1.57)
Maintain market perform with a target price (TP) of RM1.50: IGB Real Estate Investment Trust’s (REIT) first-quarter of financial year 2018 (1QFY18) realised net income (RNI) of RM82.3 million came in well within consensus (24%) and our expectations (27%). 1QFY18 gross dividend per unit (GDPU) of 2.48 sen was declared, which included a 0.08 sen non-taxable portion, also within our FY18 estimate (FY18E) target (26%) of 9.67 sen, implying 6.4% yield.
1QFY18 top line was up by 2.3% on higher rental income. Net property income (NPI) margin was up by 4.3 percentage points (ppts) on lower property operating expenses. This was on the back of a slight increase in interest income allowing RNI to increase by 9.1%. Quarter-on-quarter (q-o-q), top line was up by 1.8% on positive reversions, while the NPI margin increased by 5.8 ppts due to similar reasons mentioned above. All in, RNI increased by 6.6% despite higher expenditure (5.8%) and financing cost (16.3%), which increased back to normalised levels post a write-back of step-up interest from the fixed-rate term loan in 3QFY17 and 4QFY17.
We expect minimal capital expenditure of RM15 million to RM25 million on minor refurbishments and upkeep of both malls. FY18 will see 37% and 18% of Mid Valley Megamall’s (MV) and The Gardens Mall’s (TGM) net lettable areas (NLAs) up for expiry, while FY19 will see 23% and 44% of MV’s and TGM’s NLAs up for expiry respectively. We do not expect any acquisitions in the near term. Southkey Mall in Johor is slated for completion in the second half of FY18 (2HFY18), but we expect the acquisition to only post one reversion cycle, likely by FY21.
We anticipate low- to mid-single digit reversions for both assets for FY18 to FY19. Our FY18E to FY19E GDPU of 9.7 sen to 9.9 sen (net dividend per unit of 8.7 sen to 8.9 sen), suggest gross yields of 6.4% to 6.5% (net yields of 5.7% to 5.8%).
We maintain our TP based on FY18E gross dividend per share and net dividend per share of 9.7 sen and 8.7 sen, and on an unchanged 2.4ppt spread to our 10-year Malaysian Government Securities yield target of 4%. We maintain our “market perform” call at current levels, as IGB REIT is commanding a decent gross yield of 6.4% versus other predominantly retail-based Malaysian REITs’ average gross yields of 6.2%. We are comfortable with our call as we see minimal downside risk for IGB REIT in light of its prime asset positioning and asset stability (that is strong occupancy of more than 99% on positive reversions). — Kenanga Research, April 24
This article first appeared in The Edge Financial Daily, on April 25, 2018.
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