- We reaffirm our HOLD recommendation on IGB REIT (IGBR), with a lower fair value of RM1.20/unit (vs. RM1.38/unit previously), based on our FY14F DCF valuation, to account for the volatile bond market.

- IGBR’s FY13 realised net profit of RM241mil came in within expectations. The REIT declared a final DPU of 3.6sen, bringing total FY13 DPU to 7.0sen. This translates into a distribution yield of 6%.

- As FY12 results only accounted for 103 days, FY13 realised net profit was 3.7x higher than FY12. On a QoQ basis, the 1.7% slide in net property income was due to higher property costs incurred in the 4Q.

- Organic growth remains as the key driver. The REIT’s nearterm earnings will be supported by lease renewals and asset enhancement initiatives.

- That said, FY14F will be a challenging year for IGBR due to rising operating cost (i.e. 15% electricity tariff hike).

- Post result adjustment, we expect FY14F realised net profit to rise by 1.2% on the back of:- (1) Lease renewals for 37% and 31% of net lettable areas for Mid Valley Megamall and The Gardens Mall respectively; and (2) Visit Malaysia Year 2014, which will negate the slowdown in domestic consumption.

- FY15F will continue to be a challenging year in view of cautious consumer spending as a result of the GST implementation from 1 April 2015 onwards. We are also introducing our FY16F earnings of RM252mil.

- The potential downside risk to our earnings estimates are:- (1) DBKL’s decision on the assessment rates which is reported to be finalised by 1Q; and (2) a slowdown in consumer spending given the rising cost of living.

- Our HOLD call is premised on the lack of near-term catalysts in the form of inorganic growth. Its visible acquisition, Southkey City in Johor, would only happen earliest in 2018.

- At the current level, the stock offers a distribution yield of 6.1% for FY14F.

Source: AmeSecurities