IGB Real Estate Investment Trust (July 18, RM1.74)

Maintain buy with an unchanged target price (TP) of RM1.85: IGB Real Estate Investment Trust’s (REIT) second quarter of financial year 2018 (2QFY18) results and second interim net distribution per unit of 2.14 sen (year-to-date: 4.62 sen) were within expectations. Our FY18 to FY20 earnings estimates and dividend discount model-based TP of RM1.85 (cost of equity: 7.6%) are unchanged. IGB REIT is still our preferred retail REIT pick.

Its 2QFY18 net profit was RM70.2 million (+4% year-on-year [y-o-y]; -15% quarter-on-quarter [q-o-q]), bringing its first half of FY18 (1HFY18) earnings to RM152.4 million (+7% y-o-y), which were 49% and 48% of our and the consensus FY18 net profit forecasts. Its 2QFY18 earnings were higher, mainly driven by lower operating expenses for its malls, on the back of: i) sustained high occupancy rates (end-June 2018 committed occupancy at about 100% for both malls); ii) positive rental reversions; and iii) positive tenant sales growth (single-digit growth in 1HFY18). Q-o-q earnings, however, were seasonally lower whereby tenant sales growth in 1QFY18 was lifted by Chinese New Year festive shopping.

Our earnings estimates are intact for now. We are anticipating stronger y-o-y rental income growth in 3QFY18, driven by accelerated tenant sales following the zero-rating of the goods and services tax from June 1 to Aug 31, 2018. Subsequently, we also expect tenant sales to ease in 4QFY18 after the implementation of the sales and services tax on Sept 1, 2018. Turnover sales account for about 12 to 15% of IGB REIT’s rental income.

We remain positive on IGB REIT’s resilient earnings, which are largely backed by its two malls’ prominent locations, which in turn sustain its rental rates and high occupancy rates. In the long term, we also look forward to the injection of Mid Valley SouthKey Megamall in Johor — but we expect the acquisition of the asset to only take place beyond FY21. — Maybank IB Research, July 16

This article first appeared in The Edge Financial Daily, on July 19, 2018.

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