Investment Highlights

• We initiate coverage on IGB REIT with a BUY recommendation and fair value (FV) of RM2.09 based on a target yield of 4.5% over its FY22F distributable income. We are projecting IGB REIT to record RM205.7mil, RM318.3mil and RM332.4mil of distributable income in FY20F–FY22F, with earnings growing by 55% (from low base) and 4% in FY21F–22F, on the back of a gradual recovery of footfall as the Covid-19 pandemic subsides, and thus the recovery of retail spending, which supports the growth of average rental rates.
• Our investment case for IGB REIT is based on:

1. It being a proxy for REITs to retail consumption growth postpandemic. Both the malls owned by IGB REIT, i.e. Mid Valley Megamall (MVM) and The Gardens Mall (TGM) (Exhibit 4) are the flagship neighborhood malls in Klang Valley, and we believe they can return stronger in the aftermath of the pandemic as retailers consolidate their physical footprint to focus more on the flagship malls, amidst a shift in their business strategy to online expansion to rationalise costs during the pandemic. We believe IGB REIT is strategically positioned to benefit from the growth in Malaysia's economy, supported by its main consumers group – the mass affluent, who usually have better spending power, especially during an economic expansion.
2. In a position to ride the wave of recovery. With the recent news on the encouraging development of Covid-19 vaccines, we believe we are counting down to the end of the pandemic. This means that social distancing in the retail shopping malls could finally come to an end, enabling the recovery of footfall at malls, and thus IGB REIT's performance. We believe IGB REIT is poised for a strong recovery from its low in 2QFY20, taking cue from the strong QoQ rebound in 3QFY20, which recorded a robust growth of 294% in net profit. While it might see an earnings contraction in 4QFY20F due to the second CMCO which was reinstated in 14 October 2020 in Klang Valley, we believe it could be less severe as compared to 2QFY20 as most retail shops are still allowed to operate as usual. The year-end shopping season will also support traffic at the malls, as well as the return of residential and office traffic. We are projecting IGB RET's footfall to recover to pre-Covid levels by 2HFY21F.

• The key risks to our assumptions include: (i) slower-than-expected footfall recovery; (ii) lower than-expected occupancy rate; and (iii) weaker-than-expected recovery in consumer spending.
• At our valuation of RM2.09 (based on FY22F forward target yield of 4.5%), IGB REIT offers a potential upside of 19%. 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 good customer profile, and we believe it is poised to benefit from the growth in Malaysia’s economy post-pandemic. We also favour IGB REIT as a recovery play with reasonable returns with dividend yields of more than 4% for FY21F and beyond amidst the current low interest rate environment. We initiate our coverage with a BUY recommendation.

Source: AmInvest Research - 14 Dec 2020