Positive rental reversion seen for IGB REIT

IGB Real Estate Investment Trust (April 26, RM1.68)

Maintain hold with a target price (TP) of RM1.75: IGB Real Estate Investment Trust’s (IGB REIT) first quarter ended March 31, 2017 (1QFY17) net realised distributable income of RM75.4 million (up 3.5% [year-on-year]) came in line with our/consensus expectations.

The 1QFY17 recorded net property income (NPI) of RM96.1 million (up 2.6% y-o-y) due to higher rental income in the current quarter. This translates into an NPI margin of 71.9% (1QFY16: 71.4%).

IGB REIT’s Mid Valley Megamall (MVM) and The Gardens mall (TG) are in prime locations, which have underpinned near-full occupancies and resilient shopper footfall.

Its average rental rates of RM10-RM12 per square foot (psf) per month are still lower than prime areas in KL’s city centre that exceed RM20psf per month. This provides headroom for positive rental reversions going forward.

However, there are no near-term rerating catalysts from asset injections, as the retail asset currently being developed by sponsor IGB Corp (to which it has the right of first refusal) will only be completed in 2018.

We expect the REIT to shift towards a 95% payout (from full payout) from financial year ended Dec 31, 2016 (FY16) and hence, distribution per unit (DPU) growth may be flattish.

Among its peers, IGB REIT has the highest direct exposure to retail spending as more than 10% of total revenue is derived from turnover rent. Thus, a severe decline in tenant sales at MVM and TG will likely affect IGB REIT’s earnings and DPU.

Our dividend discount model-derived TP is reduced to RM1.75 as we tweak risk-free rate to 4% from 3.9% previously (cost of equity 6.7%, TG 1%).

We maintain our “hold” recommendation as there is limited earnings upside in the near term. — AllianceDBS Research, April 26

This article first appeared in The Edge Financial Daily, on April 27, 2017.

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