Analysts still favour IGB REIT despite lowering earnings forecasts

KUALA LUMPUR (April 27): Despite some analysts trimming their earnings forecast for IGB Real Estate Investment Trust (IGB REIT), they still favour the REIT saying that signs of stronger footfall and tenant sales at the group are hints to better quarters ahead.

RHB Institute Research said it continues to like IGB REIT for its solid recovery prospects upon mass vaccinations and the broad reopening of the economy as well as considering its fully tenanted retail assets, strategic rental structure, and largely domestic shopper profile. The local research house kept its "buy" call on the REIT with an unchanged target price (TP) of RM1.95. 

“IGB REIT has the biggest revenue-sharing portion out of all the REITs under coverage (at >10%), and stands to benefit the most from the return in footfall traffic — expected during Aidil Fitri and the year-end festivities in 2Q21 and 4Q21.

“Its largely domestic shopper profile also indicates that normalised footfall, to pre-pandemic levels, can be achieved faster than malls with a sizable exposure to tourists,” said its analyst Loong Kok Wen in a note today.

Loong also gathered from the REIT’s management that occupancy remained robust, at above 90%, at both malls — Mid Valley Mall (MVM) at 99%, and The Gardens Mall (TGM) at 92% as at December 2020 — and that reversions for renewals to date have been flat. 

“The vacant space at TGM (12% of total NLA), following Robinsons Malaysia’s departure, has been divided up to house specialty stores, with two-thirds of the space currently taken up. Barring a reinstated MCO (Movement Control Order), following the resurgence of cases of late — which could result in further delays — we think the mall will be able to enjoy full occupancy soon,” she added. 

However, RHB cut its earnings forecasts for the financial year ending Dec 31, 2021 (FY21) by a further 4% to take into account the impact from MCO 2.0.

Meanwhile, Hong Leong Investment Bank (HLIB) Research favours IGB REIT for its prime asset location and reliance on domestic footfall, which the research house believes would experience a quicker recovery post-MCO.

“As we understand, IGB REIT will still be providing rental assistance to its tenants that require support on a case-to-case basis. We believe IGB REIT’s low exposure to tourists (less than 10% exposure to international tourists) and its prominent location will aid in speeding up the recovery from Covid-19 pandemic impact.

“We cut our FY21 earnings by 5% to reflect lower rental and car park income due to MCO during the quarter.

“Maintain ‘buy’ with unchanged TP of RM1.91. Our TP is based on FY22 DPU [distribution per unit] on a targeted yield of 4.5% which is derived from two-year historical average yield spread between IGB REIT and 10-year MGS [Malaysian Government Securities] yield,” said its analyst Farah Diyana Kamaludin.

CGS-CIMB Research also kept its "add" call for the stock as it raised its TP to RM1.93 from RM1.89, as the local research house believed that IGB REIT is “set to benefit from a potential recovery in 2H21”. 

CGS-CIMB noted in a report today that the REIT is observing better footfall and minimal rental assistance. 

“We gathered that at end-1Q21 (MCO 2.0 ended on March 4), footfall has improved to about 80% recovery rate vs. pre-Covid-19 levels, while tenant sales should be stronger q-o-q in 2Q21F.

“We [also] believe that at end-1Q21, average renewal rate for tenancies expiring in FY21F should have well crossed the 50% mark as retailers look forward to a potential recovery in consumer spending underpinned by the nationwide vaccination programme. We expect a flattish rental reversion in FY21F,” said CGS-CIMB’s analyst Sharizan Rosely.

He also expects selective rental assistance to remain an option in order to manage tenant dropouts and occupancy in the coming quarters but should substantially be lower than the estimated RM34 million in FY20.

“Our FY21-23F EPS [earnings per share] and DPU are intact; decent dividend yields of 4.4% to 5.4%,” Sharizan added.

Meanwhile, AmInvestment Research has maintained its forecasts and fair value of RM2.03 for the group based on a target yield of 4.5% over its FY22 distributable income. It also kept its "buy" call.

“At our valuation of RM2.03, IGB REIT offers a potential upside of 15%. We like IGB REIT as we believe its long-term outlook remains positive given its strategically located assets in the heart of Klang Valley and more balanced footfall profile (i.e. only moderate exposure to tourists), enabling it to capitalise on the recovery in domestic consumption while waiting for the borders to reopen.

“We favour IGB REIT as a recovery play with reasonable returns with dividend yields of more than 5% for FY22F and beyond amidst the current low interest rate environment,” said the research house.

At the time of writing, IGB REIT had fallen three sen or 1.69% to RM1.74, giving the group a market capitalisation of RM6.27 billion.

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