IGB Real Estate Investment Trusts’ (“IGBREIT”) 2QFY20 net profit came in weaker than expected as business was adversely impacted by mandatory closures of stores due to lock-downs following the Movement Control Order (“MCO”) from 18 March 2020 to 28 April 2020 to contain the novel coronavirus. 2Q realized net profit of RM19.5m (-75.0% YoY, -71.5% QoQ) was below our and consensus estimates, with the 1HFY20 realised net profit only constituting c.30% and c.35% of our and consensus estimates. We cut of FY20/21 by -20%/-4% to account for the worse-than-expected rental revenue. Maintain Neutral call and RM1.72 TP given current weak consumer sentiment. We believe REITs’ defensive attributes could be weakened further on higher credit risks amid a damaging recession.

• Revenue dropped 54.1% YoY in 2QFY20 to RM62.0m with net property income lower by 62.1% to RM37.4m. Correspondingly, profit after tax was RM19.5m, dropping 75.0% compared with the corresponding quarter in 2019 of RM77.9m. The steep decline was mainly due to the rental support provided to tenants and lower car park income arising from the Covid-19 pandemic and resultant MCOs. The distributable income for the current quarter amounted to RM24.0m, consisting of realised profit of RM19.5m and the non-cash adjustments arising mainly from Manager fees, payable in units, of RM3.7m.

• Adverse impact due to MCO. We understand that IGBREIT’s rental income is negatively impacted by rental support programme and could suffer a potential increase in expected credit losses and possible fair value impairments for its investment properties arising from the prolonged MCO period. However, we understand that since the start of the Recovery MCO on 10 June 2020, both of its malls have seen a gradual and cautious but apparent increase in footfall and vehicle traffic volume

Source: PublicInvest Research - 21 Jul 2020