IGB REIT seen to have lower non-renewal risk

IGB Real Estate Investment Trust (Oct 25, RM1.70)
Maintain buy with with a higher target price (TP) of RM1.89: With the increasing volatility in the market, IGB Real Estate Investment Trust’s (REIT) dividend yield of 6% looks reasonably attractive. Cumulative nine months of financial year 2018 (9MFY18) earnings are within our and street’s estimates. The net profit growth was largely driven by higher rental income from Mid Valley Megamall (MVM) and The Gardens Mall (TGM). We trim financial year ending 2018 till financial year ending 2020 forecast (FY18-FY20F) earnings by 1% for housekeeping purposes.

IGB REIT’s 9MFY18 core net profit of RM228.2 million was within ourand street’s expectations. 9MFY18 revenue increased by 2% year-on-year (y-o-y), mainly underpinned by higher rental income from both Mid Valley Megamall (MVM) and The Gardens Mall (TGM). Meanwhile, core net profit grew at a slower pace of 0.9% y-o-y on the back of higher interest expense this year. The higher interest, in turn, was from a one-time write-back of step-up interest arising from a fixed-rate term loan that was fully settled in the third quarter of 2017 (3Q17).

The REIT manager has decided to change its distribution period from a half-yearly basis to a quarterly one, starting from this financial year. For third quarter of 2018 (3QFY18), it declared that 95% of income will be distributed. This translates into a distribution per unit (DPU) of 2.29 sen (no dividend declared in 3QFY17). Year to date (YTD), it has declared a total DPU of 6.91 sen. Thus far, the REIT has consistently distributed 95% of its total income, and this is expected to continue for the rest of the year.

We understand that currently, MVM is undergoing some minor AEI works at the centre court. The AEI is expected to be completed by year-end, with a minimal increase in net lettable area (NLA) of less than 10,000 sq ft. Meanwhile, the AEI in TGM completed last month involved the basement area. The AEI has increased TGM’s NLA by 15,000 sq ft (less than 2% of the TGM’s NLA).

The pipeline asset for IGB REIT — Southkey Mid Valley The Mall —is currently on track to commence operating in December. We were informed that the current committed occupancy rate has surpassed 80%. Having said that, the mall is unlikely to be injected into the REIT anytime soon, as newer malls take at least one rental cycle (3-4 years) to stabilise.

We trim FY18-FY20F earnings by 1% for housekeeping purposes. However, we nudge up our discount dividend model-based TP to RM1.89 after rolling over our valuation to FY19. We believe IGB REIT has relatively lower non-renewal and earnings downside risks among all MREITs, due to the positioning of both its malls. In addition, with the increasing volatility in the market, its dividend yield looks reasonably attractive. Downside risks to our call include a prolonged weak domestic consumer sentiment. — RHB Research Institute, Oct 25

This article first appeared in The Edge Financial Daily, on Oct 26, 2018.

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