Results

• 9M15 revenue of RM367.8m was translated into normalised net profit of RM200.9m, accounting for 75.1% and 76.0% of HLIB and consensus FY forecasts, respectively.

Deviations

• Largely in-line.

Dividends

• None. Dividends normally declared in 2nd and 4th quarter.

Highlights

• Total revenue for 9M15 jumped by +7.5% yoy on the back of higher contribution from rental income (+9.1%) and other revenue (+2.3%).

• Rental income grew on the back of higher rental rates from new and renewed lease, mainly achieved post asset enhancement initiatives. We also understand that the management company was able to increase service charge in FY15, which leads to higher revenue collection.

• Slight NPI margin compression owing to increase in other expenses (Figure #5).

• As for future acquisitions, we opine that the Sponsor pipeline is long dated and limited, as we expect the Southkey development in Johor to take more than two years to be ready for injection into IGB REIT.

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 IGBREIT in long 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 subdued consumer sentiment and hence lower bargaining power of the management company over tenant 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 - 28 Oct 2015