nvestment Highlights

• We downgrade our recommendation on IGB REIT to HOLD from BUY with a lower our fair value (FV) to RM1.65 (from RM1.85 previously). Our valuation for IGB REIT is based on a target distribution yield of 5% over a lower FY23F distribution income. No adjustment to our ESG scoring of 3 stars (Exhibit 9).

• We cut our distribution income forecasts for FY22–24F by 13%, 4%, and 1% to RM240mil, RM317mil and RM343 mil respectively (from RM276mil, RM329mil and RM340mil). This is after factoring in a lower rental reversion amid the continued challenging operating environment in retail malls as some tenants still require rental assistance in the near term.

• IGB REIT’s FY21 distribution income of RM399.5mil was within our expectations, but above consensus’. It amounted to 99% of our earlier full-year estimates of RM223mil and 108% of consensus full-year estimates.

• In 4QFY21, IGB REIT’s gross revenue improved 25% QoQ to RM119mil vs. RM95.8mil in 3QFY21. This is largely due to the pick-up in the retail footfall and sales following the full economic reopening under the National Recovery Programmed (NRP) Phase 4. Also, consumers spent more during the year-end holiday season. This provided some relief in the rental support offered to the tenants as well as higher car park income. The distribution income surged 84% QoQ to RM79.6mil vs RM43.1mil in 3QFY21. This is mainly due to a lower reimbursement cost (Exhibit 1).

• In FY21, IGB REIT’s gross revenue and distribution income fell 14% and 15% YoY to RM399.5mil and RM220.6mil respectively (vs. RM465.2mil and RM259.8mil in FY20). The decline in both gross revenue and net profit was due to the increase in rental support for the tenants and lower car park income arising from MCOs in FY21 (Exhibit 1).

• The net lettable area (NLA) of The Gardens Mall (TGM) expanded slightly to 850,371 sq ft in FY21 from 839,396 sq ft in FY20 (Exhibit 2).

• On a positive note, the occupancy rate for both Mid Valley Mall (MVM) and TGM is at nearly 100% (Exhibit 3). This is because TGM has a new tenant for the unoccupied shop lots that were previously occupied by Robinsons. Namely, MST Golf is currently occupying the 2nd floor, amounting to approximately 40,000 sq ft of NLA.

• IGB REIT’s net gearing ratio stayed relatively unchanged at 26.1%, well below the statutory threshold of 60%.

• IGB REIT’s distribution per unit (DPU) declined 11% YoY to 6.03 sen in FY21 vs. 6.75 sen in FY20. The DPU yield dropped to 3.9% in FY21 vs. 4.4% in FY20.

• Management highlighted that the retail footfall in both MVM and TGM has recovered to 80–90% of the pre-Covid level in the last quarter of FY21. Management has renewed almost half of the projected tenancies due to expire in FY22 (Exhibit 4). Nevertheless, we expect some projected tenancies will be negotiated at a lower rental reversion rate.

• We have turned cautious on IGB REIT's outlook in FY22F due to: (i) the rental reversion rate that is unlikely to recover to the pre-pandemic level in FY22 and will turned slightly negative in order to retain good tenants; (ii) some tenants that will still require assistance in the form of rental rebates in the near term; (iii) higher borrowing cost due to potential hikes in interest rates; and (iv) narrowing yield spread between IGB REIT and the 10-year Malaysian Government Securities (MGS) (Exhibits 5 & 6).

Source: AmInvest Research - 27 Jan 2022