Investment Highlights

• We maintain our HOLD recommendation on IGB REIT with a revised fair value (FV) of RM1.74 (from RM1.65) after changing our valuation method to the dividend discount model (DDM). No changes to our neutral 3- star ESG rating (Exhibit 8).

• We raise our distributable income forecast by 22% for FY22F. This is after factoring in a higher occupancy rate with minimal rental assistance to tenants and lowering our forecast for reimbursement cost. We have raised our estimate for occupancy rate to 99.7% from 90.7% for The Gardens Mall (TGM) and from 96% for The Mid Valley Megamall (MGM).

• Footfall at MVM and TGM recovered to almost 90% of pre-Covid levels. Hence, lower rental assistance will be required moving forward to retain existing tenants and attract new tenants.

• IGB REIT reported a 1QFY22 distributable income of RM91.9mil. Excluding the reversal for impairment of trade receivables, its distributable income of RM87mil came in above our and consensus' expectations. It accounted for 36% of ours and 31% of streets’ full-year estimates. The variance was mainly due to higherthan-expected rental income as stronger shopper volume and tenant sales for the festive season increased the variable portion of rents tied to the sales of retail stores.

• In 1QFY22, IGB REIT’s gross revenue surged 35% YoY to RM134mil while net property income (NPI) climbed 73% YoY to RM108mil. The improvement was driven by higher rental income and lower rental rebates offered to tenants. Meanwhile, distributable income jumped 89% YoY supported by the reversal in impairment of trade receivables.

• Occupancy rates for both the MVM and TGM remained stable at 99.7% in 1QFY22 (Exhibit 3).

• IGB REIT’s net debt-to-asset ratio fell slightly to 18.8%, the lowest among the REITs under our coverage.

• IGB REIT declared its first interim gross DPU of 2.5 sen in 1QFY22. It was 5% higher than that of 1QFY19 (the pre-pandemic level) (Exhibit 1).

• Our valuation is now based on DDM compared to FY23F’s distribution yield of 5% against the projected distributional income previously (Exhibit 2). The change is envisaged to be better capture the medium to longterm prospects of the company which distributes at least 95% of its income to unitholders as dividends.

• Moving forward, we foresee stronger earnings in 2QFY22, underpinned by revenge spending for the Hari Raya Aidilfitri festive season after a series of muted celebrations in the last 2 years impacted by tighter SOPs for Covid-19. However, we expect sales of retail stores and mall footfall to slow down after the festive season with rising inflation pressures anticipated to impact consumer spending. We do not expect a substantial impact from the reopening of international borders on IGB REIT. This is due to its low exposure to international tourists (less than 10% of footfall from international tourist).

• IGB REIT is currently trading at 19x 2022F PE, close to its 5-year historical average of 20x. Meanwhile, the DPU yield stands at 5.1%, slightly higher than our in-house economist forecast for the 10-year MGS yield of 4.4%— 4.5%.

• We remain cautious on IGB REIT amid the following: (i) rental reversion remains soft in FY22; (ii) the prospects of tenant sales remain bumpy as higher inflation could inevitably reduce the purchasing power of consumers; (iii) interest rate rise which is likely to lead to the decline in yield spread against the 10-year MGS. Also, we do not rule out the possibility of stagflation, which could substantively dampen the company’s revenue and earnings due to lower occupancy rates and negative rental reversion.

Source: AmInvest Research - 28 Apr 2022