Results

• 6M15 revenue of RM246.8m was translated into normalised net profit of RM135.7m, accounting for 51.5% and 55.1% of HLIB and consensus FY forecasts, respectively.

Deviations

• Largely in-line.

Dividends

• First interim dividend of 4.47 sen (1H14: 3.89 sen) was declared, for which 4.40 sen is taxable while 0.07 sen is non-taxable.

Highlights

• Total revenue for 6M15 jumped 7.5% yoy on the back of higher contribution from rental income (+8.1%) and other revenue (5.5%).

• We note that rental income has contributed positively to the earnings post rental reversion for new and renewed outlets in 2014 for both Mid Valley Megamall and The Garden Mall. On the other hand, other revenue also grew post asset enhancement initiatives (AEI) as service charges have increase thereafter.

• Total operating expenses are also well contained evident by -4.2% yoy drops, largely from lower utilities and quit rent assessment. We have seen utilities cost came down after AEI as energy consumption is now more efficient.

• Combined higher revenue with lower cost, NPI margin has improved to 71% in 2Q15 vs. 68% in 2Q14 (Figure #5).

Risks

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

Forecasts

• Unchanged.

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 as well as unchanged 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 Jul 2015