Investment Highlights

• We maintain our BUY call and fair value of RM1.85 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 FY21F distributable income forecasts for IGB REIT by 6% to RM223mil while keeping FY22F–23F earnings. This is to factor in higher rental rebates given to tenants due to the prolonged MCO this year. Likewise, our FY21F dividend distribution has been reduced by 6% to 6.3 sen and remaining unchanged at 7.8 sen for FY22F and 9.2 sen for FY23F, translating into yields of 3.8%, 4.6% and 5.5% respectively.

• IGB REIT’s 9MFY21 distributable income of RM141mil (-22% YoY) came in below our expectations but within consensus, accounting for 59% of our earlier full-year forecast of RM238mil and 65% of street’s.

• The key variance against our forecasts came largely from higher-than-expected rental rebates arising from slower recovery from the pandemic together with higher-than-expected reimbursement cost.

• IGB REIT’s 9MFY21 revenue contracted by 9% YoY to RM280mil (vs. RM318mil in 9MFY20), 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) shrank by 19% YoY to RM181mil (vs. RM224mil in 9MFY20) and distributable income declined by 22% YoY to RM141mil (vs. RM182mil in 9MFY21), largely due to increased reimbursement costs and higher allowance for trade receivables. Hence, IGB REIT’s proposed distribution income for 9MFY21 deteriorated by 17% YoY to 3.9 sen per unit (from 4.7 sen per unit in 9MFY20).

• QoQ, the company’s revenue improved by 13% to RM96mil vs. RM85mil in 2QFY21 mainly due to lower rental support provided to tenants. However, NPI slid by 11% QoQ and distributable income fell 12% QoQ, dragged by the surge in reimbursement costs and higher allowance for trade receivables.

• IGB REIT’s debt-to-asset ratio remains at 23%, which is well below the regulatory threshold of 60% (temporarily increased from 50% until 31 December 2022 as part of the Covid-19 relief measures implemented by the Securities Commission). 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 post-pandemic recovery.

• The key takeaways from our engagement with the company yesterday are:
  • Since the easing of lockdown restrictions in October, its retail malls (i.e. Mid Valley Megamall and The Garden Mall) under IGB REIT have seen strong footfall recovery as compared to 3Q, with weekend footfalls recovering to almost 80% of pre-pandemic levels.
  • The occupancy rate for Mid Valley Megamall remains excellent at the high range of 90%. However, The Garden Mall’s occupancy rate was slightly lower at the low 90% range mainly due to the remaining vacant net lettable areas (NLAs) which were previously occupied by the Robinsons store (closed down due to Covid-19 pressure). To recap, while two-thirds of the NLAs have already been taken up by Isetan, renovations were impacted by construction delays due to the MCOs as discussions in securing new tenants have also been slow amid the lockdowns.
  • Moving forward, the company is hopeful that rental assistance given to tenants could be substantially reduced following the reopening of the economy. We expect 4Q to be the strongest quarter of the financial year with the easing of lockdown measures and cross-borders restrictions, coupled with the year-end shopping and holiday season, which should support footfall recovery and retail spending at the malls.
• We like IGB REIT given its more resilient long-term outlook underpinned by strategically located assets in the heart of Klang Valley and better balanced footfall profile with moderate exposure to tourists, which positions the group to capitalise on domestic consumption recovery while waiting for international tourists to return. We view IGB REIT as a recovery play with compelling double-digit earnings growth and dividend yields of more than 4.5% for FY22F and beyond the backdrop of the current low interest rate environment.

Source: AmInvest Research - 27 Oct 2021