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IGB Real Estate Investment Trust (Jan 27, RM1.38)
Maintain buy with an unchanged target price (TP) of RM1.60: IGB Real Estate Investment Trust’s (IGB REIT) 2015 realised net profit of RM254 million (+9.2% year-on-year [y-o-y]) fell short of our expectations, accounting for 92% of our forecast, but was in line with the consensus estimate (96% of the forecast).
This was mainly due to a lower-than-expected profit before tax margin (52% compared with the forecast of 54%) because of higher borrowing costs, which saw an increase of 14.8% y-o-y.
On the whole, net property income was up 9.6% y-o-y mainly driven by gross rental income (+7.3% y-o-y) attributed to renewals and additional net lettable area (NLA) of 40,000 sq ft, as well as a decrease of 1.8% y-o-y in operating expenses. IGB REIT announced a final distribution per unit of 3.72 sen.
We keep earnings forecasts unchanged pending clarification from management on the sharp increase in interest expenses. We maintain “buy” on IGB REIT with a discounted dividend model-derived 12-month TP of RM1.60, based on the following underlying unchanged assumptions: an 8.2% cost of equity, 6% equity risk premium and 3% terminal growth rate.
Despite the weaker consumer sentiment, we continue to like IGB REIT due to its stable occupancy rates (close to 100%); an additional 40,000 sq ft in NLA subsequent to the asset enhancement initiatives done in 2014; more efficient cost management; and both Mid Valley Megamall and The Gardens Mall being key suburban shopping destinations.
Recall that 45% of The Gardens Mall’s NLA is up for renewal and therefore a stronger rental reversion is likely in 2016. Longer-term key catalysts include asset injections, such as the Southkey Megamall and 18@Medini (in the Iskandar development region) post-2018. Key risks include a slowdown in consumer spending, competition from new supply of retail space (2015 to 2016) and higher debt-refinancing rates. — Affin Hwang Capital, Jan 27
This article first appeared in The Edge Financial Daily, on Jan 28, 2016. Subscribe to The Edge Financial Daily here.
