Results

• 1Q15 revenue of RM125.4m was translated into normalised net profit of RM69.9m, accounting for 27.0% and 29.3% of HLIB and consensus FY forecasts, respectively.

Deviations

• Above expectations.

• Normalized net profit beat ours and consensus mainly due to: (i) higher than expected rental income; and (ii ) better cost management arising from asset enhancement works.

Dividends

• None (1Q14 : None).

• Semi-annually, normally declared during 2Q and 4Q.

Highlights

• Rental revenue jumped 11.6% yoy after completion of major renewals at MidValley Megamall (MVM), including anchor tenants – AEON and Golden Screen Cinemas. On top of that, MVM and The Garden Mall (TGM) welcomed 67 and 21 new high profile tenants throughout 2014, respectively.

• Total operating expenses has come down by 3.4% yoy due to lower utilities and quit rent assessment. We believe this is achieved as a result of continuous asset enhancement initiatives by management, especially in maintaining efficient power consumption and distribution of airflow.

• We noted that management remain focus on asset enhancement works by carrying out reconfiguration works in MVM which will add another 40,000 sq ft NLA in 2015. We also understand that new premium brands such as Bath & Body Works, Under Armour, Victoria Secrets and Yeast will be introduced in 2015.

Risks

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

Forecasts

• We factor in higher rental rate into our model and resulting to increase in our FY15-17 DPU assumptions by 1-4%.

Rating

HOLD , TP: RM1.37

Positives –

• Construction of MidVelley SouthKey by the parent company, potential to be injected into the IGBREIT in long term.
• Pure retail play given its 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 subdued consumer sentiment and hence lower bargain between the tenant and management company for rental reversion.
• No catalyst in near term.

Valuation

Maintain HOLD recommendation on the equity and higher TP of RM1.37.

• Targeted yield at 5.6% based on historical average yield spread of IGB REIT and 7-year MGS.

Source: Hong Leong Investment Bank Research - 29 Apr 2015