Stronger rental reversion seen for IGB REIT in 2016

IGB Real Estate Investment Trust (Sept 9, RM1.30)

Maintain buy with an unchanged target price (TP) of RM1.60: We noted that consumer spending picked up in the third quarter of 2015 compared with the second quarter for Mid Valley Megamall (Mid Valley) as well as The Gardens Mall, driven mainly by the festive Raya season, ongoing promotions and adjustments to new price levels, post goods and services tax (GST) implementation.

We also believe that there will be a spillover effect into the fourth quarter, given the year-end festive season and holidays, while an expectation of higher tourist arrival (on the back of an attractive ringgit) will spur retail spending, which is expected to remain resilient as the malls are also surrounded by affluent neighbourhoods.

IGB Real Estate Investment Trust’s (IGB REIT) key strength lies in its track record of high renewal rates with the more established Mid Valley a testament, with occupancy rates consistently at 100% even during challenging economic times. The Gardens also has an occupancy rate of 100% and has seen the entry of new high-profile tenants annually.

There will be a stronger rental reversion expected in 2016, as 45% of The Gardens’ net lettable area (NLA) will be up for renewal. Meanwhile, Mid Valley will see 24% to 25% of NLA to be renewed.

We reiterate our “buy” rating with a discounted dividend model-
derived 12-month TP. In our view, despite weaker consumer sentiment (due to repercussions of the GST and higher cost of living), IGB REIT’s earnings are expected to remain resilient on the back of stable occupancy rates (of around 100%), an additional 40,000 sq ft in NLA in 2015, and more efficient cost management.

Financial year ending Dec 31, 2015 (FY15) to FY17 distribution per unit yields remain attractive at 6.8% to 7.7%. Longer-term key catalysts include asset injections, such as the Southkey Megamall and 18@Medini (in the Iskandar Development Region) by 2020. Key risks include slowdown in consumer spending, competition from new supply of retail space (FY15 to FY16) and higher debt-refinancing rates. — Affin Hwang Capital, Sept 9

This article first appeared in the digitaledge DAILY on Sept 10, 2015. Subscribe here.