Investment Highlights

• We maintain BUY on IGB REIT with an unchanged fair value (FV) of RM1.92/unit based on our dividend discount model (DDM) and a neutral 3-star ESG rating (Exhibits 6, 7).

• The FV implies a FY24F distribution yield of 6%, at parity to its 5-year median.

• We make no changes to our earnings forecasts as IGB REIT’s 1HFY23 distributable income of RM190mil came in within our and consensus’ estimates. It accounted for 50% of our FY23F earnings and 53% of consensus.

• In 1HFY23, IGB REIT’s gross revenue improved 11% YoY while net property income (NPI) climbed 4% YoY. The improvement was driven by stronger rental income as a result of favourable FY22 rental reversion in both Mid Valley Megamall (MVM) and The Gardens Mall (TGM) (Exhibits 2 & 3). Additionally, higher tenant sales in 1HFY23 increased the variable portion of rents tied to the level of retail stores’ business transactions.

• YoY, the lower NPI margin in 1HFY23 was mainly attributed to higher utilities expenses given an increased electricity tariff as well as higher reimbursement and upgrading costs.

• On a QoQ comparison, IGB REIT’s 2QFY23 gross revenue fell 9% while NPI dropped 13%. The decline in NPI was primarily due to higher tenant sales in the previous quarter (1QFY23), which were boosted by the festive season. In addition, NPI in 2QFY23 was dragged down by higher utilities expenses (+11% QoQ).

• In 2QFY23, the occupancy rates for MVM and TGM were close to 100% (Exhibits 2, 3). We are confident of IGB REIT’s ability to maintain high occupancy rates due to the strategic location of its malls.

• To date, IGBREIT has completed the renewal of a majority of leases expiring in FY23 at a rate of 4% to 6%, supported by an improvement in retail sales.

• IGB REIT adopts a proactive approach to rental renewals, typically finalising 9-12 months ahead of lease expirations. Supported by continued positive sales momentum, we are confident that the majority of leases set to expire in FY24F (Exhibit 4) will be successfully renewed in 2HFY23, with positive rental reversions close to pre-pandemic levels of 4%-6%.

• IGB REIT declared a gross distribution per unit (DPU) of 2.37 sen in 2QFY23 (-15% QoQ, -3% YoY), representing a 12- month trailing distribution yield of 6%.

• Our in-house economist anticipates the Fed fund rate to peak between 5.5%-5.75% by 3QCY23 from current levels of 5.25%-5.5%. As such, we expect the uptrend in 10-year US Treasury yield to be tapering off with the expectation that the Federal Reserve may pause rate hikes after 3QCY23.

• With the expectation of the end of global monetary policy tightening, our economist forecasts 10-year MGS to be lower at 3.75% (from current level of 3.8%) in 4QCY23 with a gradual decline to 3.5% by 4Q2024. However, we do not rule out the possibility that the 10-year MGS yield could be lower than our projection of 3.75% in 2023 should there be a change in Fed’s hawkishness on rate hikes.

• We anticipate IGB REIT’s yield spread from FY23F onwards to widen to 2.7% vs. 5-year median of 1%. Hence, we expect IGB REIT to be appealing to yield-seeking investors with its higher distribution spread against 10-year MGS (Exhibit 5).

• IGB REIT offers a compelling FY24F distribution yield of 6.5% vs. 10-year MGS yield of 3.8%.

• We like IGB REIT due to its resilient long-term outlook underpinned by the group’s strategically located assets in the heart of Klang Valley. In addition, it has a better balanced footfall profile comparatively with moderate exposure to tourists. This positions the group to be able to better capitalise on domestic consumption recovery while international tourist arrivals gradually regain momentum.

Source: AmInvest Research - 27 Jul 2023