IGB Real Estate Investment Trust (REIT) (April 20, RM1.35)

Maintain hold with a higher target price (TP) RM1.45: While we like IGB REIT for its strong earnings resilience, it lacks near-term growth catalysts. The management saw a strong pick up in tenant sales in the first quarter of financial year ending Dec 31, 2015 (1QFY15) pre-goods and services tax (GST) implementation, but expect this to ease off for at least the next two quarters.

Currently, turnover rent contributes about 12% to 13% of IGB REIT’s gross revenue. Elsewhere, 33% and 15% of net lettable area (NLA) in Mid Valley Megamall and The Gardens Mall respectively, are up for renewal in FY15. Thus far, renewal indications are positive; we estimate an average 8% growth per lease cycle in rental rates.

We trim our FY15 turnover rental income growth forecast to 0% year-on-year (y-o-y) from 3% in view of the slowdown in consumer spending. The lower percentage rent would, however, be mitigated by full-year contribution from an additional 40,000 sq ft NLA resulting from the space reconfiguration exercise at Mid Valley’s third floor (South Court) in the second half of 2014.

All in, we raise our FY15, FY16 and FY17 net profit forecasts by 5.5%, 7.2% and 8% following the revision of our key assumptions. Meanwhile, we understand that the construction of Mid Valley SouthKey Megamall in Iskandar, Johor would be completed by end of FY17, and it is IGB REIT’s only visible new asset pipeline from its sponsor. This renders acquisition activities unlikely for the next three years.

We maintain a “hold” call on IGB REIT with a higher TP. Share price downside is limited by its FY15 and FY16 net yield of 5.5% and 5.7%. — Maybank IB Research, April 20

This article first appeared in The Edge Financial Daily, on April 21, 2015.

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