IGB Real Estate Investment Trust (April 29, RM1.37)
Reiterate buy with target price (TP) of RM 1.60: IGB Real Estate Investment Trust’s (IGBREIT) first quarter ended March 31 of financial year 2015 (1QFY15) net profit (+21% year-on-year [y-o-y)] beat both our and consensus estimates, as it accounts for 30% of our FY15 estimates.
Key deviations were primarily lower operating expenses (as utility charges were sharply lower despite a hike in electricity tariffs effective Jan 1, 2014 and higher top-line growth due to expansion in the net lettable area (NLA) (by 31,341 sq ft on a y-o-y basis) subsequent to the completion of asset-enhancement initiatives (AEI).
Overall 1QFY15 earnings before interest and tax rose by a robust 17% y-o-y and 19.2% quarter-on-quarter (q-o-q), bolstered by gross rental income (+11.6% y-o-y, +7.5% q-o-q), which represents 79% to total revenue (+9.9% y-o-y, +4.9% q-o-q); and lower operating expenses (-2.1% y-o-y, -15.3% q-o-q) as utility charges were lower by 8.3% y-o-y while other expenses were 33% lower q-o-q.
Pre-goods and services tax (GST) spending and seasonal Chinese New Year spending had also partially driven up turnover rent during the quarter, though it was not the key driver.
We reiterate our buy rating with a higher dividend discount model-derived 12-month TP. Earnings were raised by about 20% for 2015-17E, driven by our increased NLA assumptions of 31,341sq ft arising from the AEI done in 2014 (at the South and North Court of Mid Valley Megamall), higher rental rates and lower operating expenses (by 12% to 15%) due to cost-cutting initiatives.
Our valuation assumptions of 8.2% cost of equity, 6% equity risk premium and a 3% terminal growth rate remain unchanged. IGBREIT will continue to see sustained earnings growth despite weaker consumer sentiment (due to repercussions of the GST and higher cost of living) on the back of stable occupancy rates of (close to 100%) and both Megamall and The Gardens Mall being key suburban shopping destinations.
Distribution per unit yields for 2015-17E are attractive at 6.6% to 7.5%. Longer-term key catalysts include asset injections, such as the Southkey Megamall (1.5m sq ft NLA) and [email protected] (in Iskandar Development Region). — Affin Hwang Capital, April 29
This article first appeared in The Edge Financial Daily, on April 30, 2015.