GB Real Estate Investment Trust (July 16, RM1.73)

Maintain buy with an unchanged target price (TP) of RM1.89: IGB Real Estate Investment Trust’s (REIT) first half year ended June 30, 2018 (1HFY18) revenue of RM264.8 million (+1.4% year-on-year [y-o-y]) translated into a core net profit of RM152.4 million (+6.5% y-o-y). The results were within both our and consensus expectations, accounting for 47.9% and 48.3%, respectively.

IGB REIT declared a second quarter ended June 30, 2018 (2QFY18) distribution per unit of 2.14 sen per unit (2QFY17: 4.38 sen per unit), representing a payout ratio of 95%, in line with our expectation. To recap, IGB REIT has changed the distribution period from half-yearly to quarterly since 1QFY18.

Revenue for 2QFY18 of RM128 million reduced by 6.4% against the previous quarter of RM136.8million. This was mainly due to higher rental income received in the immediate preceding quarter as a result of higher rental rates. However, this was slightly mitigated by an increase in other income by 1.7%. Core net profit decreased by 14.7% to RM70.2 million from RM82.3 million in 1QFY18. The decline was driven by lower rental income and higher property operating expenses in the current quarter.

IGB REIT’s 2QFY18 revenue increased by 0.5% as compared with RM127.3 million in 2QFY17. This was primarily caused by higher rental income in the current period, showcasing a 0.8% increment; nevertheless, it was slightly offset by a 0.5% decline from other income. As a result, core net profit increased by 3.6% mainly due to the higher rental income as well as lower property operating expenses in the current period.

Revenue for the first six months of 2018 (6MFY18) of RM264.8million increased by 1.4% from RM261 million in 6MFY17. Essentially, the increment was contributed by higher rental income resulting from positive rental reversion. Normalised net profit of RM152.4 million showed an increase of 6.5% from RM143.1 million in 6MFY17, which was caused by both higher rental income and lower property operating expenses.

Both properties, Mid Valley Megamall and The Gardens Mall, are operating with high occupancy rates of close to 100%, driven by the strategic prime location.

We expect both of IGB REIT’s assets, Mid Valley Megamall and The Gardens Mall, to continue to perform well as we believe they are shielded from the challenging retail environment in Klang Valley due to the concentrated prime assets with high traffic, sustainable positive tenant sales growths and rental reversions. — Hong Leong Investment Bank Research, July 16

This article first appeared in The Edge Financial Daily, on July 17, 2018.

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