IGB REIT FY2016 earnings within expectations

IGB Real Estate Investment Trust (Jan 26, RM1.75)

Maintain neutral with a higher target price (TP) of RM1.73: IGB Real Estate Investment Trust (REIT) FY2016 earnings were within expectations. Its financial year ended Dec 31, 2016 (FY2016) core net income of RM277.8 million was within expectations, meeting 103% and 101% of our and consensus full-year estimates respectively. A distribution per unit (DPU) of 4.30 sen was declared, bringing the total DPU to 8.71 sen in FY2016.

IGB REIT reported stronger sequential earnings in 4QFY2016 which grew 2% quarter-on-quarter to RM70.3 million. On a yearly basis, earnings was decent whereby 4QFY2016 core net profit increased 32% year-on-year (y-o-y) as last year’s earnings was dragged by the surge in borrowing cost. That brought FY2016 core net profit to RM277.8 million, increasing 9% y-o-y.

IGB REIT managed to record yet another positive earnings growth in FY2016 since its listing in FY2012 despite the challenging retail backdrop in FY2016, mainly due to the sustainable positive rental reversion of around +5% per annum in Mid Valley Megamall and the Gardens Mall which was underpinned by the high occupancy rates of the two malls.

We revise upwards our earnings forecast for FY2017 marginally by more than 1% post the release of FY2016’s numbers. We also introduce our earnings forecast for FY2018. We estimate IGB REIT to continue on positive earnings trajectory going forward due to the  strong demand for retail space in Mid Valley Megamall and positive rental reversion of +5%.

We are forecasting earnings in FY2017 and FY2018 to grow 4.3% and 5.9% respectively. We maintain “neutral” with a revised TP of RM1.73 (previously RM1.63), as we roll over our valuation to FY2017. Our TP is based on the dividend discount model valuation (required rate of return: 7.5%, perpetual growth rate: 1.5%).

While we are positive about the earnings outlook for IGB REIT, dividend yield had tapered off to 4.9% following the recent run up in share price. Hence, we maintain our “neutral” call on IGB REIT.
— MIDF Research, Jan 26

This article first appeared in The Edge Financial Daily, on Jan 27, 2017. Subscribe to The Edge Financial Daily here.