Investment Highlights

• Our BUY call is retained with a slightly lowered fair value of RM1.85 (from RM1.89 previously) based on a target distribution yield of 5% over IGB REIT’s FY23F distributable income with no adjustment for ESG based on our 3-star rating (Exhibit 2).

• We cut our distributable income forecasts for IGB REIT by 19% to RM237.5mil for FY21F, 15% to RM276.1mil for FY22F and 2% to RM328.6mil for FY23F, factoring in higher rental rebates given to tenants due to the prolonged MCO. Likewise, our FY21–23F distribution projections have been reduced by 2%–19% to 6.7 sen, 7.8 sen and 9.2 sen respectively, translating into yields of 4.0%, 4.7% and 5.6% respectively.

• This is because IGB REIT’s 1HFY21 distributable income of RM97.9mil (-1% YoY) came in below our and the streets’ expectations, accounting for 33% of our full-year forecasts and 39% of consensus’ full-year estimates. We believe the key variance came largely from higher-than-expected rental rebates and lower-than-expected occupancy rates at The Garden Mall.

• IGB REIT’s 1HFY21 revenue contracted slightly by 1% YoY to RM184.4mil (vs. RM187mil in 1HFY20), mainly due to rental support provided to tenants and lower car park income caused by the various MCOs during the quarter.

• Meanwhile, its net property income (NPI) was flattish at RM125.5mil (vs. RM125.8mil in 1HFY20), and distributable income declined slightly by 1% to RM97.9mil (vs. RM98.5mil in 1HFY21), partly cushioned by the lower utilities expenses. Hence, IGB REIT’s proposed distribution income for 1HFY21 improved by a slight 5% YoY to 2.68 sen per unit (from 2.56 sen per unit in 1HFY20).

• QoQ, the company’s revenue deteriorated by 15% to RM84.9mil as compared to RM99.4mil in 1QFY21, mainly due to higher rental support provided to tenants. However, its NPI and distributable income improved slightly by 1% QoQ each, thanks to lower property maintenance expenses.

• IGB REIT’s debt-to-asset ratio remains at 23%, which is well below the regulatory threshold of 60% (temporarily increased limit from 50% until 31 December 2022 as part of the relief measure implemented by the Securities Commission in light of Covid-19). At current levels, we believe IGB REIT still has ample headroom to gear up for future acquisitions. The company guided that it does not rule out potential acquisitions if yield accretive assets emerge, which will further drive the REIT’s medium-to-long term growth beyond recovery.
   
• The Key Takeaways From Our Engagement With the Company Yesterday Are:
  • Under the recent lockdown, the retail malls (i.e. Mid Valley Megamall and The Garden Mall) under IGB REIT only recorded 10% of pre-pandemic footfalls during 2QFY21 as compared to 60%–70% before MCO 3.0 which commenced on 6 May 2021. The company is confident that footfalls will rebound strongly once SOPs are relaxed as vaccination rates continue to increase, similar to what happened in the past.
     
  • During MCO 3.0 in this quarter, only 10% of the tenants are in operation, as compared to almost all tenants/shops that were open (except for non-essential services that were prohibited to operate) before the lockdown was imposed.
     
  • The occupancy rate for Mid Valley Megamall remains excellent at 100% during the quarter. However, The Garden Mall’s occupancy rate was slightly lower at low 90%, mainly due to the remaining vacant net lettable areas (NLAs) which was previously occupied by Robinsons stores (closed down due to Covid-19 pressures). On a positive note, two-thirds of the NLAs have already been taken up by Isetan, pending renovation as construction works are currently restricted during the MCOs. The company guided that most of the tenancy contracts expiring by this year are being renewed at relatively flat rental rates.
     
• At our valuation of RM1.85, IGB REIT offers a potential upside of over 10%. We like IGB REIT given its positive longterm outlook underpinned by strategically located assets in the heart of Klang Valley and more balanced footfall profile (i.e. only moderate exposure to tourists), which put the group in a position to capitalise on the recovery in domestic consumption while waiting for borders to reopen. We view IGB REIT as a recovery play with reasonable returns and dividend yields of more than 4.5% for FY22F and beyond against the backdrop of the current low interest rate environment.

Source: AmInvest Research - 27 Jul 2021