Investment Highlights

• We downgrade our recommendation on IGB REIT to HOLD from BUY as the share price surged 13% since our previous update. No change to our neutral 3-star ESG rating (Exhibit 6).

• Nevertheless, we raised our DDM-based fair value (FV) slightly to RM1.90/unit (from RM1.86/unit previously) to reflect a lower risk-free rate as a result of the yield decline in 10-year Malaysian Government Securities (MGS) from 4.3% to 4% (Exhibit 5). This implies a FY24F distribution yield of 6%, at parity to its 5-year median.

• We make no changes to our earnings forecast as IGB REIT’s FY22 distributable income of RM362mil came in within our estimates, albeit above consensus' expectations. It was almost on the dot of our forecast while 10% above street’s.

• We also take the opportunity to introduce our FY25F earnings with a growth of 4% on expectation of a normalisation of rental reversion of 5% and stronger tenants’ sales.

• In FY22, IGB REIT’s gross revenue surged 39% YoY while net property income (NPI) climbed 53% YoY. The improvement was driven by lower rental rebates offered to tenants.

• On a QoQ comparison, IGB REIT’s 4QFY22 gross revenue expanded 6% while NPI grew 4%. These were driven by higher occupancy rates in Mid Valley Megamall (MVM), which rose to 99.9% in 4QFY22 from 99.7% in 3QFY22. Meanwhile, the occupancy rates for The Garden Mall (TGM) was almost 100% in 4QFY22. (Exhibit 2).

• We foresee a positive rental reversion in FY23F/FY24F of 1%- 3% with the assumption of a gradual normalisation of economic and social activities following the transition to the endemic phase of Covid-19.

• Its footfall and tenants’ sales have also recovered to prepandemic levels in FY22. We believe the growth trajectory of tenants’ sales to continue in 1QFY23 due to the increased demand for consumer goods during the festive season.

• 49% of its tenancies in MGM and 50% in TGM are set to expire in FY23 (Exhibit 3). We see minimal risk of non-renewal of most of the leases with the improving outlook in retail sector.

• IGB REIT declared its gross distribution per unit (DPU) of 2.5 sen in 4QFY22. The FY22 DPU of 9.9 sen represents a distribution yield of 6%.

• We anticipate the Fed rate to peak in 1HFY23 as a result of weaker economic data and softening inflation. Our in-house economist projects another 0.75% hike in the Fed rate in 1HCY23 from the current level of 4.25%-4.5%. Meanwhile, the 10-year MGS yield is forecasted to be lower by the end of 2023 at 3.8%-4%.

• We anticipate the yield spread from FY23F onwards to widen to 2% vs. 5-year median of 1%. However, the recent surge in share price has led to the narrowing of its yield spread against 10-year MGS (Exhibit 7).

• As IGB REIT is currently trading at an unexciting FY24F PE of 18x vs. 2-year average (pre-pandemic FY18-19) of 15x, we see limited upside potential at this juncture.

Source: AmInvest Research - 20 Jan 2023