Results

• FY14 revenue of RM461.8m was translated into normalised net profit of RM232.6m, accounting for 99.6% and 103.4% of HLIB and consensus FY forecasts, respectively.

Deviations

• Broadly in-line

Dividends

• Second interim dividend of 3.90 sen (3.82 sen taxable and 0.08 sen non-taxable) was declared during fourth quarter with ex-date on 10th February 2015.

• YTD dividend amounted to 7.79 sen per unit (FY13: 7.04 sen), above ours and street’s full year DPU forecasts, accounting for 114.7% and 109.7% respectively.

Highlights

• Full year revenue increases 7.5% yoy mainly on the back of higher new and renewed lease in FY14. We gathered that the positive rental reversion was on strong double digit for 27% and 54% of net lettable area for Mid Valley Megamall and The Gardens Mall respectively.

• NPI margin remains healthy at 66% while total operating expenses margin reduced to 32% (FY13: 34%), indicating improvement in managing the properties despite increase in electricity tariff and assessment charges.

• We opine that despite the short term headwinds for REITs sector in 2015 (i.e. GST implementation and continued subsidy rationalization by the government), IGB REIT will continue to deliver positive earnings growth due to its high quality prime retail mall.

• In our opinion, low gearing of 20% gives flexibility for IGB REIT to tap into debt markets for future strategic acquisitions.

Risks

• High portfolio concentration, with only two malls
• Highly sensitive to a downturn in consumer spending.

Forecasts

• Unchanged.

Rating

HOLD , TP: RM1.34

Positives –

• Construction of MidVelley SouthKey by the parent company potentially to be injected into IGBREIT in longer term.
• Pure retail play with pricing power and potentially higher rental income from rental reversion.
• Diversification of malls (i.e. prime retail mall (The Gardens) and semi-prime retail (MidValley Megamall)) Negatives –
• Implementation of GST in April 2015 will subdue consumer sentiment and hence lower bargain between the tenant and management company for rental reversion.
• No catalyst in near term.

Valuation

• Maintain HOLD with a higher TP of RM1.34 (previously RM1.23) as we roll forward our valuation to FY15.
• Targeted yield at 5.6% based on historical average yield spread of IGB REIT and 7-year MGS.

Source: Hong Leong Investment Bank Research - 28 Jan 2015