Results

• Within expectations. 2QFY17 normalised net profit of RM67.7m (qoq: -10.2%; yoy: +2.7%) translated into 1HFY17 normalized net profit of RM143.1m (+3.1% yoy). The results are within expectations, accounting for 49.2% of our and 47.5% of consensus full year estimates.

Deviations

• None.

Dividends

• DPU of 4.38 sen (1HFY16: 4.41 sen) was declared, representing a payout ratio of 95%.

Highlights

• YoY: 2QFY17 normalized net profit of RM67.7m grew 2.7% on the back of positive rental reversion rate but was partially offset by higher maintenance and property upgrade expenses.
• QoQ: Net profit declined by 10.2% mainly due to lower rental income as 1Q tends to benefit from festive season spending.
• YTD: Normalized net profit increased by 3.1% mainly due to positive rental reversion and lower borrowing costs, partially offset by higher maintenance and property upgrade expenses.
• Occupancy rate remained close to 100% while yoy NPI margin slightly declined to 69% (from 70%). The renewals for lease expiry in 2017 for both Mid Valley Megamall and The Gardens Mall are largely completed with healthy reversion of mid-single digit.
• Outlook: We expect both Midvalley Megamall (MVM) and The Gardens Mall (TGM) to continue to register positive tenant sales growth in 2H as we expect retail sales to be boosted by higher tourist arrivals.

Risks

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

Forecasts

• Unchanged.

Rating

BUY ↔ , TP: RM1.84 ↔

• We believe IGB REIT is shielded from current challenging retail environment in Klang Valley due to prime location and high traffic enjoyed by both MVM and TGM. Moreover, prudent management and healthy balance sheet further enhance attractiveness of the stock.

Valuation

• Maintain BUY recommendation with unchanged TP of RM1.84 based on targeted yield at 5.4%, which is 1SD below historical average yield spread between IGB REIT and 10-year MGS considering its highly stable assets and sustainability of yield.

Source: Hong Leong Investment Bank Research - 03 Aug 2017