IGB REIT declares distribution of 3.72 sen per unit

IGB Real Estate Investment Trust (Jan 27, RM1.38)

Maintain buy with an unchanged target price (TP) of RM1.60: IGB Real Estate Investment Trust’s (IGB REIT) 2015 realised net profit of RM254 million (+9.2% year-on-year [y-o-y]) fell short of our expectations, accounting for 92% of our forecast, but was in line with the consensus estimate (96% of the forecast).

This was mainly due to a lower-than-expected profit before tax margin (52% compared with the forecast of 54%) because of higher borrowing costs, which saw an increase of 14.8% y-o-y.

On the whole, net property income was up 9.6% y-o-y mainly driven by gross rental income (+7.3% y-o-y) attributed to renewals and additional net lettable area (NLA) of 40,000 sq ft, as well as a decrease of 1.8% y-o-y in operating expenses. IGB REIT announced a final distribution per unit of 3.72 sen.

We keep earnings forecasts unchanged pending clarification from management on the sharp increase in interest expenses. We maintain “buy” on IGB REIT with a discounted dividend model-derived 12-month TP of RM1.60, based on the following underlying unchanged assumptions: an 8.2% cost of equity, 6% equity risk premium and 3% terminal growth rate.

Despite the weaker consumer sentiment, we continue to like IGB REIT due to its stable occupancy rates (close to 100%); an additional 40,000 sq ft in NLA subsequent to the asset enhancement initiatives done in 2014; more efficient cost management; and both Mid Valley Megamall and The Gardens Mall being key suburban shopping destinations.

Recall that 45% of The Gardens Mall’s NLA is up for renewal and therefore a stronger rental reversion is likely in 2016. Longer-term key catalysts include asset injections, such as the Southkey Megamall and 18@Medini (in the Iskandar development region) post-2018. Key risks include a slowdown in consumer spending, competition from new supply of retail space (2015 to 2016) and higher debt-refinancing rates. — Affin Hwang Capital, Jan 27

Do not ask your uncle about the value of your home. Click here at The Edge Reference Price to find out.

This article first appeared in The Edge Financial Daily, on Jan 28, 2016. Subscribe to The Edge Financial Daily here.