Investment Highlights

• We maintain BUY on IGB REIT with a higher fair value (FV) of RM2.11/unit (from RM1.98/ unit previously) based on our revised dividend discount model (DDM) and a neutral 3-star ESG rating . This implies a FY25F distribution yield of 5%, at parity to its 5-year median.

• We tweaked our FY24F-FY26F earnings to reflect higher rental income and reconfiguration exercise of tenants.

• IGB REIT’s 1HFY24 net profit of RM204mil was within expectations, accounting for 56% of our forecast and 54% of street’s.

• In 2QFY24, IGB REIT’s gross revenue improved 6% YoY while net property income (NPI) rose 6.5% YoY. The improvement was mainly attributed to the full occupancy rate of Mid Valley Megamall (MVM) and higher footfall traffic from retail offerings.

• QoQ, IGB REIT’s 1HFY24 gross revenue slid 7.7% while NPI dropped 12%. This is mainly due to the higher operating expenses from reconfiguration work on tenant space.

• Metrojaya as an anchor tenant of IGBREIT, historically pays lower rent. The reconfiguration gives IGBREIT an opportunity to raise rental rates by downsizing Metrojaya's leased space and conversion into new specialty stores with higher rent potential.

• Metrojaya reconfiguration was completed in June, with the reconfigured stores handed over to tenants. One store has already opened and the others are undergoing renovations. All reconfigured stores are expected to contribute earnings in 4QFY24.

• QoQ, the occupancy rate of Mid Valley Megamall has returned to 100% in 2QFY24 on top of the completion of reconfiguration exercise from 88.6% in 1QFY24. The Gardens Mall’s occupancy rate remains strong at 99.9% in 2QFY24.

• Southkey Megamall in Johor Bahru has an impressive occupancy of nearly 100% and benefiting from its strategic location near the Causeway link, which attracts footfall traffic from Singapore. We anticipate IGBREIT to inject Southkey Megamall by end of 2025, following the completion of most rental renewals.

• IGB REIT declared its gross distribution per unit (DPU) of 2.51 sen in 2QFY24. The 12-month trailing DPU of 10.8 sen represents a distribution yield of 5.6%.

• 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.

• IGB REIT offers a compelling FY24F distribution yield of 5.3% vs. 10-year MGS yield of 3.76%, which translate to a decent distribution yield spread of 1.5% against 10-year MGS .

Source: AmInvest Research - 26 Jul 2024